Maximizing Partnership Loss Deductions

By: Tyler B. Korn, Esq.

The Korn Law Firm, P.L. / Tel (239) 354-4300

If you are expecting a loss for the tax year from your interest in a partnership, but do not currently have enough basis in your partnership interest to allow a full deduction, several solutions exist.

In general, a partner cannot take a loss on his or her individual tax return greater than his or her basis in the partnership interest as of the last day of the partnership’s tax year.

A partner’s basis in the partnership interest is generally equal to the amount of cash contributed to the partnership by the partner, plus the partner’s basis in any property contributed to the partnership, plus the partner’s share of partnership debt. (Contributed property that is subject to debt involves more complex rules beyond the scope of this article.) Basis is then increased by the partner’s share of any partnership income or gains and any subsequent contributions made to the partnership. Basis is generally decreased (a) by cash distributions received by the partner from the partnership, (b) by the basis of property distributed to the partner, and (c) by the partner’s share of deductible losses.

Accordingly, if you anticipate that you will be allocated losses from the partnership that will be non-deductible because they exceed your basis, four basic approaches can be considered to increase your basis before the end of the partnership’s tax year:

1. Accelerate planned contributions to the partnership;

2. Defer distributions from the partnership until your basis is increased in the following year by your allocable share of income or gains;

3. Have the partnership increase its debt load; or

4. Increase the proportion of partnership debt that is allocable to you for tax purposes, without increasing your recourse liability.

It should be noted that if the passive loss rules apply to you, or you have amounts that are not considered to be at-risk in the partnership, different solutions will be required.

If you have any questions about how the foregoing strategies can be applied to your situation, please feel free to call us at (239) 354-4300.

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