Bailey owns a 20% interest in a partnership (not involved in real estate) in which his at-risk amount was $25,000 at the beginning of the year. During the year, Bailey receives a distribution of $20,000 from the partnership. The partnership produces an $80,000 loss during the year. If you ignore the passive loss rules, Bailey's deductible loss for the year is:
$5,000
$20,000
$25,000
$80,000
is it 20,000
$25,000 - $20,000 = $5,000 remaining basis. The $16,000 allocated to Bailey is limited to the $5,000 at-risk.
Answer: $5,000
To determine Bailey's deductible loss, we need to consider the at-risk rules.
The at-risk amount is the money invested in a business venture by a partner, and it represents the maximum amount the partner can claim as a loss. In this case, Bailey's at-risk amount is $25,000.
Bailey received a distribution of $20,000 from the partnership during the year. Distributions reduce the partner's at-risk amount. So, Bailey's remaining at-risk amount is $25,000 - $20,000 = $5,000.
The partnership incurred an $80,000 loss during the year. However, Bailey can only deduct the loss up to his at-risk amount of $5,000. Since his deductible loss is limited to the remaining at-risk amount, Bailey's deductible loss for the year is $5,000.
Therefore, the correct answer is $5,000.