The TimpRiders LP has operated a motorcycle dealership for a number of years. Amir is the limited partner, Francesca is the general partner, and they share capital and profits equally. Francesca works full time managing the partnership. Both the partnership and the partners report on a calendar-year basis. At the start of the current year, Amir and Francesca had basis of $10,000 and $3,000, respectively, and the partnership did not have any liabilities. During the current year, the partnership reported the following results from operations:Net sales$ 650,000Cost of goods sold500,000Operating expenses160,000Short-term capital loss2,000Tax-exempt interest2,000§1231 gain6,000On the last day of the year, the partnership distributed $3,000 each to Amir and Francesca. What outside basis do Amir and Francesca have in their partnership interests at the end of the year?How much of their losses are currently not deductible by Amir and Francesca because of the tax-basis limitation?To what extent does the passive activity loss limitation apply in restricting their deductible losses for the year?

A partnership is an agreement between two or more persons or entities to run a business together, and share the responsibilities and profits/losses from the business together as co-owners as per the sharing ratio decided in the partnership deed by them. A partnership generally is of three types; general partnership (who actively participates in the work of the business), limited partnership (who does not involve in day-to-day operations and are the silent investors), and limited liability partnership.1. Calculation of the outside basis of Amir and Francesca in their partnership interests at the end of the year: Formula snip:2. As per the calculation in part 1 above, Amir's loss allocations are deductible as his losses are not limited by his tax basis but Francesca's share of the loss amount of the $2,000 is not deductible because of her tax-basis limitation.3. The passive activity loss limitation does not apply to Francesca as she is a general partner who works full-time for the management of the partnership and is considered a material participant. While Amir, on the other hand, is liable for passive activity loss limitation. Although his loss allocation is not under limitation due to the tax basis, his share of business loss is classified as a passive activity loss because of his status as a limited partner. But his share of the short-term capital loss of $1,000 is not limited as it is considered as a portfolio rather than a passive activity loss. So, he needs to carry over his ordinary business loss of $5,000 as a passive activity loss until he either earns passive income or sells his partnership income. Hence, the passive activity loss limitation rules only apply to Amir on his $5,000 loss share from the ordinary business loss.

Answered: The TimpRiders LP has operated a…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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The TimpRiders LP has operated a motorcycle dealership for a number of years. Amir is the limited partner, Francesca is the general partner, and they share capital and profits equally. Francesca works full time managing the partnership. Both the partnership and the partners report on a calendar-year basis. At the start of the current year, Amir and Francesca had basis of $10,000 and $3,000, respectively, and the partnership did not have any liabilities. During the current year, the partnership reported the following results from operations:

Net sales	$ 650,000
Cost of goods sold	500,000
Operating expenses	160,000
Short-term capital loss	2,000
Tax-exempt interest	2,000
§1231 gain	6,000

On the last day of the year, the partnership distributed $3,000 each to Amir and Francesca.

What outside basis do Amir and Francesca have in their partnership interests at the end of the year?
How much of their losses are currently not deductible by Amir and Francesca because of the tax-basis limitation?
To what extent does the passive activity loss limitation apply in restricting their deductible losses for the year?

Definition Definition Arrangement between two or more people whereby they agree to manage business operations and share its profits and losses in an agreed ratio. The agreement drafted and signed by the partners of the firm is termed as a partnership deed and contains various important clauses agreed between the partners such as profit/loss sharing, interest on capital, remuneration allocation of each partner, and drawings of a partner.

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