Transcript Partnership Three Hurdle Loss Regime

Partnership Three Hurdle Loss Regime
Hurdle One: Basis Limitation – 704(d)
Hurdle Two: At-Risk Limitation – 465
Hurdle Three: Passive Loss Limitation – 469
Note:
1. All hurdles determined at individual partner level
2. Current loss deduction requires clearing all three
hurdles. If you clear two and miss one, loss must be
Law T510 - Estate and Gift Taxcarried forward.
Instructor: Dwight Drake
A537 - Corporate & Partnership Tax
Instructor: Dwight Drake
Balance Sheet Basics
Partnership Three Hurdle Loss Regime
Assets = Liabilities + Partner Equity
Hurdle One: Basis Limitation – 704(d)
Hurdle Two:
At-Risk Limitation=– Partner
465
Assets
– Liabilities
Equity
Hurdle Three: Passive Loss Limitation – 469
Assets
– Partner Equity = Liabilities
Note:
1. All hurdles determined at individual partner level
2. Current loss deduction requires clearing all three
hurdles. If you clear two and miss one, loss must be
Law T510 - Estate and Gift Taxcarried forward.
Instructor: Dwight Drake
A537 - Corporate & Partnership Tax
Instructor: Dwight Drake
Balance Sheet Basics
Year 1
Year 2
Year 3
Partnership Three Hurdle Loss Regime
Assets
Cash
100,000
50,000
40,000
Inventory
200,000
220,000
180,000
Hurdle One: Basis Limitation – 704(d)
ARs
300,000
250,000
240,000
Hurdle Two: At-Risk Limitation – 465
Total
600,000
520,000
460,000
Hurdle Three: Passive Loss Limitation – 469
Liabilities
400,000
440,000
530,000
Note:
Partner Equity
200,000
80,000
(70,000)
1. All hurdles determined at individual partner level
Total Liabilities
& Equity
600,000
520,000all three
460,000
2. Current loss deduction
requires clearing
hurdles. If you clear two and miss one, loss must be
Incomecarried
(Loss)forward.
Law T510 - Estate and Gift TaxInstructor: Dwight Drake
For Year
0
(120,000)
(150,000)
A537 - Corporate & Partnership Tax
Instructor: Dwight Drake
Basis 704 (d) Limitation
Three
Hurdle
Loss Regime
• Partnership
Easiest of the
three
hurdles
Basis Limitation – 704(d)
• Hurdle
EachOne:
partner’s
share of aggregate losses of
entity
from
activities
compared
to partner’s
Hurdle
Two:all
At-Risk
Limitation
– 465
outside basis. If less, you home free. If more,
Hurdlecarried
Three: Passive
excess
over. Loss Limitation – 469
Note:
• Remember 752 basis twist for partnership
1. All hurdles
individual
partner
liabilities.
Thisdetermined
usually at
saves
the day
bylevel
increasing
outside
basis.requires clearing all three
2. Current
loss deduction
hurdles. If you clear two and miss one, loss must be
Law T510 - Estate and Gift Taxcarried forward.
Instructor: Dwight Drake
A537 - Corporate & Partnership Tax
Instructor: Dwight Drake
At-Risk 465 Limitation
•
Theory: One should not get loss for money that he or she
Partnership
Three Hurdle Loss Regime
will never lose. Must really be “at-risk”
• Hurdle
Compare
partner’s
allocable
loss from each activity against
One: Basis
Limitation
– 704(d)
partner’s “at-risk” amount on that activity. If loss less, you
home Two:
free. If
loss greater,
carry –forward.
Hurdle
At-Risk
Limitation
465
• Hurdle
“At-Risk”
amounts
contributed
Three: amount
Passive is
Loss
Limitation
– 469 to activity and
debt for which partner is personally liable and partnership’s
recourse debt. Debt is “recourse” if creditor can sue partner
Note:
under state law and borrowed from person who has no
interest
in activity.
1. All hurdles
determined at individual partner level
•
exception:
Qualifiedrequires
non-recourse
financing
2.Big
Current
loss deduction
clearing
all three
hurdles.
If you
two and
missorone,
loss must be
- Obtained
fromclear
commercial
lender
government
Law T510 - Estate and Gift Taxcarried
forward.
- Holding
of real
estate isDwight
the activity
Instructor:
Drake
- No one personally liable
- Debt not convertible
A537 - Corporate & Partnership Tax
Instructor: Dwight Drake
Basis & At-Risk Comparison
Two Huge Differences:
Partnership Three Hurdle Loss Regime
1.
Basis is applied on aggregate net loss of partnership; At-Risk
is applied
to each activity
Hurdle
One:separately
Basis Limitation
– 704(d)of the partnership.
2. Hurdle
Basis Two:
includes
all liabilities
of partnership,
including all nonAt-Risk
Limitation
– 465
recourse liabilities. At-risk includes only recourse liabilities.
Hurdle Three: Passive Loss Limitation – 469
Thus, for at risk, what is “recourse” becomes a big deal.
Note:
- What if only one partner liable for debt?
1. All hurdles determined at individual partner level
- What if other partner not liable directly to creditor, but agrees
to
party
who is liable
if that
partner
2. indemnify
Current loss
deduction
requires
clearing
all ever
threehas to
pay?
hurdles. If you clear two and miss one, loss must be
Law T510 - Estate and Gift Taxcarried forward.
Instructor: Dwight Drake
- What if indemnifying partner can cancel indemnity at any
time activity is still solvent?
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Instructor: Dwight Drake
Non-Recourse Debt Exception Magic
Year 1
Year 2
Year 3
Partnership Three Hurdle Loss Regime
Assets
Cash
100,000
50,000
40,000
Real
Estate
3,000,000 – 704(d)
2,750,000
Hurdle
One: Basis Limitation
2,500,000
Total
3,100,000
Hurdle Two: At-Risk
Limitation –2,800,000
465
2,540,000
Non-recourse
debtPassive
3,050,000
3,050,000
Hurdle Three:
Loss Limitation
– 469
Partner
Note:Equity
50,000
(250,000)
3,050,000
(490,000)
Total1.Liabilities
All hurdles determined at individual partner level
& Equity
3,100,000
2,800,000
2,540,000
2. Current loss deduction requires clearing all three
Incomehurdles.
(Loss) If you clear two and miss one, loss must be
For Year
0 and Gift Tax(300,000)
(240,000)
Law T510 - Estate
carried forward.
Instructor: Dwight Drake
A537 - Corporate & Partnership Tax
Instructor: Dwight Drake
Problem P. 118
(a) C and D equal partners:
Beginning Basis
Share of 20k loss
704 allowed loss
Ending Basis
Carryover loss
C
5,000
10,000
5,000
0
5,000
D
15,000
10,000
10,000
5,000
0
(b) Next year partnership has 20k income. Basis impact?
C
Beginning Basis Yr 2
0
Share of 20k profits
10,000
Carryover loss
(5,000)
Ending Basis
5,000
Carryover loss Law T510 - Estate and Gift
0 Tax-
D
5,000
10,000
0
15,000
0
Instructor: Dwight Drake
(c) To avoid first year basis problem, C could have increased basis by
- Corporate & Partnership Tax
contributing A537
cash or
property or increasing share of partnership’s
Instructor: Dwight Drake
liabilities. Contributing personal note won’t do job.
Problem P. 118
(c) To avoid first year basis problem, C could have increased basis by
contributing cash or property or increasing share of partnership’s
liabilities. Contributing personal note won’t do job.
(d) What if year 1 loss 15k ordinary loss and 5k capital loss? Character
of loss allocated. C has 7.5k ordinary and 2.5 capital loss, and half
of each would be allowed and half carried over.
(e) C gives partnership interest to S at start of year 2. Per 1015, basis
and holding period carryover. Does suspended loss? In S Corp
context, IRS says “no” in Regs – loss personal to shareholder. Reg.
1.1366 -2(a)(5). 1015(a) would seem to disallow carryover, but
some commentators think there may be hope. Don’t count on it.
Law T510 - Estate and Gift TaxInstructor: Dwight Drake
A537 - Corporate & Partnership Tax
Instructor: Dwight Drake
Problems P. 122
1.
R&D, Oil & Gas; Movie
Total
Cash contribution
30,000
Nonrecourse debt
10,000
Recourse debt
0
Basis Begin
40,000
Yr Profit (Loss)
13,000
Basis end
53,000
Loss Allowed per
465 at-risk
R&D
10,000
10,000
20,000
(12,000)
8,000
Movie
20,000
0
20,000
25,000
45,000
10,000
At-risk carryover loss
Net income impact on
return
2,000
15,000.
Law T510 - Estate and Gift TaxInstructor: Dwight Drake
A537 - Corporate & Partnership Tax
Instructor: Dwight Drake
0
Problems P. 122
2.
ABC partnership building: 90k cash; 540 nonrecourse loan. At risk?
(a) Commercial bank: qualified nonrecourse financing – each partner
180k at-risk for debt.
(b) Apartment seller: Not qualified person so not qualified
nonrecourse debt. No “at risk” for debt.
(c) B brother lender; discount interest. No “at-risk” for B – related
party and not same terms as unrelated party. But probably still at
risk as to A & C if lender in the business of lending money.
(d) Same as (c) but commercially reasonable terms. B back in game
even though lender related. All get “at-risk” benefit.
What if all partners personally guarantee loan. All “at-risk”. Don’t
need qualified non-recourse
financing
exception.
Law T510 - Estate
and Gift TaxInstructor: Dwight Drake
A537 - Corporate & Partnership Tax
Instructor: Dwight Drake