Debt belongs in the partnership tax file with more detail than the loan balance. Record the borrower, lender, guarantees, collateral, repayment responsibilities and whether the lender is related to a partner. Classification and allocation can affect each partner differently. A change in a guarantee or refinancing can therefore matter even when the partnership's total debt remains similar.
Do not carry the basis number directly into the at-risk schedule
Recourse and nonrecourse liabilities have allocation rules, while the at-risk rules ask a different set of questions. Some qualified nonrecourse real estate financing can receive special treatment if the requirements are met. Other nonrecourse debt may increase outside basis without creating equivalent at-risk capacity. Review the actual financing and activity before estimating a deductible loss. Passive activity and excess business loss restrictions can apply after these tests.
Worked planning example
Assume a partner has $20,000 from cash investment and a valid $80,000 share of nonrecourse liabilities for outside basis. The $100,000 outside basis figure does not automatically mean $100,000 at risk. If the debt does not qualify for applicable special treatment, the at-risk result may be much smaller. A $60,000 allocated loss then needs sequential limitation schedules, with each suspended amount identified under the rule that stopped it.
Records to bring to the review
- Collect loan, guarantee and collateral documents.
- Classify and allocate each liability correctly.
- Calculate at-risk amounts independently.
- Recheck changes in debt and guarantees annually.
Does all nonrecourse debt fail the at-risk test?
There are special rules, including for qualifying real estate financing. Review eligibility rather than assuming all nonrecourse amounts have the same treatment.
Read this alongside the AE book and published cases
This companion guide provides additional education for readers of Partnership Tax Strategies. It is not a quotation or chapter excerpt. The worked example is hypothetical and should not be confused with a reported AE client outcome.
Use the AE Tax Advisors multi entity case-study collection to compare the assumptions and supporting records behind published reports. Reported results are publisher statements, not independently audited results or a prediction for another taxpayer. The case-study methodology explains those limits.
Primary source and next reading
IRS guidance for this topic. IRS publications can cover earlier return years; check applicable current-year instructions, law and state treatment before implementation.
Read the complete companion reading sequence or browse the existing learning library. For the broader loss framework, read how the 2026 excess business loss limitation works.
General federal tax education. Actual outcomes require complete facts, applicable law and a taxpayer-specific review. A deduction amount is not the same as tax saved or cash available.
Discuss your planning facts with AE Tax Advisors
Bring the records identified in this guide to a discovery conversation with AE Tax Advisors. Start with the decision you need to make, the year affected and the assumptions that need verification.