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Partnership Debt: Allocating Liabilities and Associated Deductions

Recourse vs. Nonrecourse Debt, Inside vs. Outside Basis, Negative Capital Accounts, and Suspended Losses

Recording of a 110-minute CPE webinar with Q&A

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Conducted on Friday, December 13, 2024

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This webinar will explain how partnership debt impacts basis and loss deductions for members and partners in LLCs and partnerships. Our panel of pass-through entity experts will discuss how partnership liabilities are categorized, address how debt impacts basis determinations and, hence, loss deductions for partners, and present scenarios examining situations frequently encountered by tax professionals when allocating liabilities.

Description

One of the most complicated components of partnership returns is understanding partnership liabilities and how liabilities impact a partner's share of partnership losses and outside basis. At the same time, tracking and recording partnership debt is critical to allocating losses to partners.

Partnership debts are classified as recourse, nonrecourse, and qualified nonrecourse liabilities. As defined by the Internal Revenue Code, a liability is recourse to "the extent a partner or related person bears the economic risk of loss for the liability." In contrast, a debt is nonrecourse if no partner bears a risk of economic loss. Qualified nonrecourse liabilities are liabilities that are nonrecourse but, among other requirements, secured by qualifying real estate. Qualified nonrecourse liabilities increase a partner's outside at-risk basis.

Since debt allocations increase a partner's outside basis and can similarly increase a partner's loss deduction, several problematic scenarios arise for tax practitioners. When debt exceeds the basis of property in a partnership, minimum gain can be triggered which at times requires special allocations of such debt and corresponding losses. Losses can be suspended if a partner does not have sufficient outside at-risk basis. Partnership advisers must grasp the rules concerning partnership debt allocations to report and deduct partners' losses correctly.

Listen as our authoritative panel of federal taxation experts breaks down the complexities of partnership debt allocations.

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Outline

  1. Partnership debt: introduction
    1. 1001 recourse vs. 752 recourse
    2. 752 recourse vs. nonrecourse vs. qualified nonrecourse
  2. Limited liability partnerships vs. other partnerships
    1. GP vs. LP vs. LLP/LLC
  3. Recourse liabilities (1.752-2)
    1. Economic risk of loss (EROL) – atom bomb test
    2. Types of guarantees
      1. Bottom-dollar payment obligations
      2. Bad boy guarantees
      3. Other
    3. Partner or related person as lender (1.752-2(c))
  4. Nonrecourse liabilities
    1. 3 tier allocation regime (1.752-3)
    2. Partnership minimum gain and nonrecourse deductions
  5. Special rules
    1. No reasonable expectation of payment (1.752-2(k))
    2. Tiered partnerships
    3. Person related to more than one partner
    4. Timing of determination
  6. Basis, capital accounts & suspended losses
    1. Effect on basis
      1. Increase in partner’s share of liabilities
      2. Decrease in partner’s share of liabilities
      3. Property subject to a liability
      4. Netting of increases/decreases in the same transaction
    2. Capital account effect
    3. Suspended losses

Benefits

The panel will cover these and other critical issues:

  • Allocating nonrecourse debt to partners
  • Handling problematic issues including negative capital accounts and suspended losses
  • How debt impacts partnership minimum gain and nonrecourse deductions
  • Identifying arrangements frequently encountered including bottom-dollar guarantees and carveouts

Faculty

Amaya-Lainez, Mario
Mario Amaya-Lainez, CPA
Director
Citrin Cooperman

Mr. Amaya-Lainez specializes in partnership taxation with a primary focus on partnership restructurings, such as...  |  Read More

Torhan, Michael
Michael Torhan
Partner
EisnerAmper

Mr. Torhan is a Tax Partner in the Real Estate Services Group. He provides tax compliance and consulting services to...  |  Read More

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