Taxation Essentials of LLCs and Partnerships

Chapter 5At‐Risk and Passive Activity Limits

Learning objectives

• Differentiate the limitations that apply to partners' or limited liability company (LLC) members' distributive share of losses from those of a partnership or LLC.
• Identify the treatment of deductions that are denied under different limitation provisions.
• Calculate the basis and amount at risk in a partnership or LLC interest for purposes of those loss limitation rules.
• Distinguish between a passive activity that would be subject to the passive loss rules, and an active activity that would not be subject to passive activity rules.

Overview

Statutory limitations on the deductibility of losses

The deductibility of pass‐through losses from a partnership or LLC is subject to three separate limitations. First, under Section 704(d), the loss may not exceed the partner or member's tax basis in the partnership or LLC interest. Second, any losses that survive the Section 704(d) limitation are subject to the at‐risk limitation of Section 465. Finally, losses may be disallowed under the passive loss limitations of Section 469 even if they do not exceed the partner or member's tax basis or amount at‐risk in the partnership or LLC. As implied in the preceding discussion, these limitations are applied sequentially. The Section 704(d) limitation is applied first, followed by the Section 465 limitation, and finally the Section 469 limitation. Amounts disallowed under each separate section are subject to different carryforward ...