Sarah Purchased for $100,000 a 10% Interest in a Business

question 68

Essay

Sarah purchased for $100,000 a 10% interest in a business venture that is not subject to the passive activity rules.
During the first year, her share of the entity's loss was $120,000. At the beginning of the second year, the entity obtained $800,000 of recourse financing. During the second year, Sarah withdrew cash of $20,000, and her share of the entity's loss was $25,000. Calculate the amount of loss that Sarah may claim in each of the two years and determine her at-risk amount at the end of each year.

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Definitions:

Perpetual System

An inventory management system that records the sale or purchase of inventory immediately through the use of computerized point-of-sale systems and enterprise asset management software.

Merchandise Inventory

Products that a retailer, wholesaler, or distributor has in stock and available for sale.

Cost of Goods Sold

Represents the direct costs attributable to the production of the goods sold by a company, including material and labor costs.

Perpetual Inventory System

An inventory tracking system where inventory levels are updated in real-time with each sale or purchase transaction, giving a continuous account of inventory on hand.