Advanced Tax Strategies for LLCs and Partnerships

Chapter 4Allocation of Partnership Nonrecourse Liabilities and Related Deductions Under Sections 752 and 704(b)

Learning objectives

• Distinguish between recourse and nonrecourse liabilities of a partnership or LLC.
• Calculate a partner’s or member’s share of nonrecourse liabilities of a partnership or LLC.
• Analyze the impact of a partner or LLC member’s guarantee of a recourse or nonrecourse liability of the entity.
• Calculate a partner or LLC member’s share of nonrecourse deductions of a partnership or LLC.
• Recognize when to treat a liability as a recognized versus contingent liability and understand how to account for partnership or LLC contingent liabilities.

Distinguishing between recourse and nonrecourse liabilities

A recourse liability is one for which any partner or related person bears personal risk of loss in the event of a partnership default.¹ For this purpose, a partner bears a personal risk of loss if he or she would be obligated to make a payment, either to a creditor or to the partnership, in the event the partnership’s assets (including cash) became completely worthless, and it was unable to satisfy its obligations. If no partner would be obligated to make any additional payments with respect to a partnership debt in this hypothetical scenario (known as a constructive liquidation), the liability is classified as a nonrecourse liability.

Obligation to make payment

In determining whether a partner would be obligated to make a payment in the event of partnership ...