Form 541 - Partnerships - Department Of Treasury Internal Revenue Service

treats an item differently on his or her individual

At-risk limits. At-risk rules apply to most trade

structions for Form 8582 and the Partner’s In-

return, the IRS can immediately assess and

or business activities, including activities con-

structions for Schedule K – 1 (Form 1065).

collect any tax and penalties that result from

ducted through a partnership. The at-risk rules

Partner’s Exclusions and

adjusting the item to make it consistent with the

limit a partner’s deductible loss to the amounts

partnership return. However, this rule will not

for which that partner is considered at risk in the

Deductions

apply if a partner identifies the different treat-

activity.

ment by filing Form 8082, Notice of Inconsistent

A partner is considered at risk for all the

To determine the allowable amount of any ex-

Treatment or Administrative Adjustment Re-

following amounts.

clusion or deduction subject to a limit, a partner

quest (AAR), with his or her return.

•

must combine any separate exclusions or de-

The money and adjusted basis of any

ductions on his or her income tax return with the

Consolidated audit procedures. In a consol-

property the partner contributed to the ac-

distributive share of partnership exclusions or

idated audit proceeding, the tax treatment of any

tivity.

deductions before applying the limit.

partnership item is generally determined at the

•

The partner’s share of net income retained

partnership level rather than at the individual

by the partnership.

Cancellation of qualified real property busi-

partner’s level. After the proper treatment is de-

•

ness debt. A partner other than a C corpora-

termined at the partnership level, the IRS can

Certain amounts borrowed by the partner-

tion can elect to exclude from gross income the

automatically make related adjustments to the

ship for use in the activity if the partner is

partner’s distributive share of income from can-

tax returns of the partners, based on their share

personally liable for repayment or the

cellation of the partnership’s qualified real prop-

of the adjusted items.

amounts borrowed are secured by the

erty business debt. This is a debt (other than a

The consolidated audit procedures do not

partner’s property (other than property

qualified farm debt) incurred or assumed by the

apply to certain small partnerships (with 10 or

used in the activity).

partnership in connection with real property

fewer partners) if all partners are one of the

used in its trade or business and secured by that

following.

A partner is not considered at risk for amounts

property. A debt incurred or assumed after 1992

•

protected against loss through guarantees,

An individual (other than a nonresident

qualifies only if it was incurred or assumed to

stop-loss agreements, or similar arrangements.

alien).

acquire, construct, reconstruct, or substantially

Nor is the partner at risk for amounts borrowed if

•

A C corporation.

improve such property. A debt incurred to refi-

the lender has an interest in the activity (other

nance a qualified real property business debt

•

than as a creditor) or is related to a person (other

An estate of a deceased partner.

qualifies, but only up to the refinanced debt.

than the partner) having such an interest.

However, small partnerships can make an elec-

A partner who elects the exclusion must re-

For more information on determining the

tion to have these procedures apply.

duce the basis of his or her depreciable real

amount at risk, see Publication 925, the instruc-

tions for Form 6198, At-Risk Limitations, and

property by the amount excluded. For this pur-

Limits on Losses

the Partner’s Instructions for Schedule K – 1

pose, a partnership interest is treated as depre-

(Form 1065).

ciable real property to the extent of the partner’s

share of the partnership’s depreciable real prop-

Partner’s adjusted basis. A partner’s distrib-

Passive activities. Generally, section 469 of

erty. However, a partnership interest cannot be

utive share of partnership loss is allowed only to

the Internal Revenue Code limits the amount a

treated as depreciable real property unless the

the extent of the adjusted basis of the partner’s

partner can deduct for passive activity losses

partnership makes a corresponding reduction in

partnership interest. The adjusted basis is fig-

and credits. The passive activity limits do not

the basis of its depreciable real property with

ured at the end of the partnership’s tax year in

apply to the partnership. Instead, they apply to

respect to that partner.

which the loss occurred, before taking the loss

each partner’s share of income, loss, or credit

To elect the exclusion, the partner must file

into account. Any loss more than the partner’s

from passive activities. Because the treatment

Form 982, Reduction of Tax Attributes Due to

adjusted basis is not deductible for that year.

of each partner’s share of partnership income,

Discharge of Indebtedness, with his or her origi-

However, any loss not allowed for this reason

loss, or credit depends on the nature of the

nal income tax return. However, if the partner

will be allowed as a deduction (up to the

activity that generated it, the partnership must

timely filed the return without making the elec-

partner’s basis) at the end of any succeeding

report income, loss, and credits separately for

tion, he or she can still make the election by filing

year in which the partner increases his or her

each activity.

an amended return within six months of the due

basis to more than zero. See Basis of Partner’s

Generally, passive activities include a trade

date of the original return (excluding exten-

Interest, later.

or business activity in which the partner does not

sions). The election must be attached to the

materially participate. The level of each

amended return with “Filed pursuant to section

Example. Mike and Joe are equal partners

partner’s participation must be determined by

301.9100 – 2” written on the election statement.

in a partnership. Mike files his individual return

the partner.

The amended return should be filed at the same

on a calendar year basis. The partnership return

address as the original return.

is also filed on a calendar year basis. The part-

Rental activities. Passive activities also in-

nership incurred a $10,000 loss last year and

clude rental activities, regardless of the partner’s

Exclusion limit. The partner’s exclusion

Mike’s distributive share of the loss is $5,000.

participation. However, a rental real estate activ-

cannot be more than the smaller of the following

The adjusted basis of his partnership interest

ity in which the partner materially participates is

two amounts.

before considering his share of last year’s loss

not considered a passive activity. The partner

was $2,000. He could claim only $2,000 of the

must also meet both of the following conditions

1) The partner’s share of the excess (if any)

loss on last year’s individual return. The ad-

for the tax year.

of:

justed basis of his interest at the end of last year

•

More than half of the personal services the

was then reduced to zero.

a) The outstanding principal of the debt

partner performs in any trade or business

The partnership showed an $8,000 profit for

immediately before the cancellation,

are in a real property trade or business in

this year. Mike’s $4,000 share of the profit in-

over

which the partner materially participates.

creases the adjusted basis of his interest by

b) The fair market value (as of that time)

•

$4,000 (not taking into account the $3,000 ex-

The partner performs more than 750 hours

of the property securing the debt, re-

cess loss he could not deduct last year). His

of services in real property trades or busi-

duced by the outstanding principal of

return for this year will show his $4,000 distribu-

nesses in which the partner materially par-

other qualified real property business

tive share of this year’s profits and the $3,000

ticipates.

debt secured by that property (as of

loss not allowable last year. The adjusted basis

that time).

of his partnership interest at the end of this year

Limited partners. Limited partners are gen-

is $1,000.

erally not considered to materially participate in

2) The total adjusted bases of depreciable

trade or business activities conducted through

real property held by the partner immedi-

Not-for-profit activity. Deductions relating to

partnerships.

ately before the cancellation (other than

an activity not engaged in for profit are limited.

For a discussion of the limits, see chapter 1 in

More information. For more information on

property acquired in contemplation of the

Publication 535.

passive activities, see Publication 925, the in-

cancellation).

Page 8

Form 541 - Partnerships - Department Of Treasury Internal Revenue Service - 2002 Page 8

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