Abe and Brenda formed the AB Partnership ten years ago as a general partnership and have been very successful with the business. However, in the current year, economic conditions caused them to lose significant amounts, but they expect the economy and their business to return to profitable operations by next year or the year after. Abe manages the partnership business and works in it full-time. Brenda has a full-time job as an accountant for a $39,000 annual salary, but she also works in the partnership occasionally. She estimates that she spent about 120 hours working in the partnership this year. Abe has a 40% profits interest, a 50% loss interest, and a basis in his partnership interest on December 31 (before considering this year’s operations) of $81,000. Brenda has a 60% profits interest, a 50% loss interest, and a basis of $104,000 on December 31 (before considering this year’s operations). The partnership has no liabilities at December 31. Neither Abe nor Brenda currently has other investments. The AB Partnership incurs the following amounts during the year.
Ordinary loss ………………………………….. $100,000
Sec. 1231 gain ………………………………….10,000
Tax-exempt municipal bond income …………..14,000
Long-term capital loss …………………………14,000
Short-term capital loss ………………………… 136,000
Early next year, the AB Partnership is considering borrowing $100,000 from a local bank to be secured by a mortgage on a building owned by the partnership with $150,000 FMV.
Required:
Prepare a presentation to be made to Abe and Brenda discussing this matter. Points that should be discussed include: What amounts should Abe and Brenda report on their income tax return for the current year from the AB Partnership? What are their bases in their partnership interests after taking all transactions into effect? What happens to any losses they cannot deduct in the current year? What planning opportunities are presented by the need to borrow money early next year? What planning ideas would you suggest for Brenda?