Question

At the beginning of 2020, Ms. Pope purchased a 20 percent interest in PPY Partnership for $20,000. Ms. Pope’s Schedule K-1 reported that her share of PPY’s debt at year-end was $14,000, and her share of ordinary loss was $30,000. On January 1, 2021, Ms. Pope sold her interest to another partner for $2,200 cash.

Required:

a. How much of her share of PPY’s loss can Ms. Pope deduct on her 2020 return?

b. Compute Ms. Pope’s recognized gain on sale of her PPY interest.

C. How would your answers to parts a and b change if PPY were an S corporation instead of a partnership?

Answer 1

(a)

Mr Pope’s Initial Cost                                       $20,000

Increased by Debt share                                    $14,000

Decreased by Loss                                           ($30,000)

Net Balance on adjusted basis as on 2020        $4,000

(b)

Amount realized on sale ($2,200 + $14,000) = $16,200

Adjusted Basis                                                  ($4,000)

Net Gain                                                            $12,200

(c)

If PPY is a Corporation then its share of loss would be limited to how much she had invested at the time of purchasing that Interest and would not include Entity's share of Debts.               Hence her Loss Deduction would be Limited to $ 20,000 and her adjusted basis on January 1, 2021 would be zero and her net gain would be $ 2,200 (sale of her Interest).

Hence,

Deduction= $ 20,000

Gain recognized= $ 2,200

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