ExpertHard1 markMultiple Choice
CPA · Question 66 · Area V: Entity Taxation
A taxpayer is a 40% partner in a partnership. The partnership has $100,000 of recourse liabilities and $50,000 of nonrecourse liabilities. The taxpayer bears the economic risk of loss for the recourse liabilities. What is the taxpayer's share of liabilities for basis purposes?
A taxpayer is a 40% partner in a partnership. The partnership has $100,000 of recourse liabilities and $50,000 of nonrecourse liabilities. The taxpayer bears the economic risk of loss for the recourse liabilities. What is the taxpayer's share of liabilities for basis purposes?
Answer options:
A.
$60,000
B.
$60,000
C.
$40,000
D.
$20,000
How to approach this question
Recourse Debt: Allocated to partners who bear risk (usually via loss ratio). Nonrecourse Debt: Allocated by profit ratio. 40% of $100k + 40% of $50k = $40k + $20k = $60k.
Full Answer
B.$60,000✓ Correct
Recourse liabilities are allocated to the partner who bears the economic risk of loss (typically based on loss sharing ratio). Nonrecourse liabilities are allocated based on profit sharing ratio. 40% x $100,000 = $40,000. 40% x $50,000 = $20,000. Total = $60,000.
Common mistakes
Allocating recourse debt by profit ratio (it's loss ratio/risk).
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