I have a general partnership with one other person. He owns 35% of the business and I own 65%. However, he spends very little time working on it (he has another full time job), while I spend a lot of time on it.

In 2012 we had a loss. It appears that my partner is not allowed to deduct his portion of that because it is a passive loss, which can only be deducted against passive gains/income, which he does not have.

My 2012 loss from the partnership would be an active loss, so I can deduct it against other income.

However, apparently we can specify any allocation we want for profits and losses from the partnership. So, then it seems we just can allocate 100% of the loss to me and I can deduct it all. But it's strange that there would be this rule if it's so easy to get around it...

Am I missing something?

Thanks!
Jesse