Desktop: Why Isn't the Loss from a K-1 Being Included in the Income Calculation?

A loss from a 1065 Schedule K-1 is not always deductible. Generally, losses from passive activities that exceed the income from passive activities are disallowed for the current year. If a loss is passive, it can only be used to offset passive income. If there is no other passive income in the return, the loss will not be deducted from the total income calculation. Instead, the loss will carry forward until it can be used to offset passive income. Form 8582 is used to calculate the loss carryforward.

Passive income and losses can come from a variety of activities, including equipment leasing, rental real estate, limited partnerships, S corporations, limited liability companies, and sole proprietorships in which the taxpayer has no material participation.

1. Is the loss entered as a passive loss in the Schedule K-1 Menu? This can be verified from the main menu of the tax return (Form 1040) by selecting:

• Income
• Rents, Royalties, Entities (Sch E, K-1, 4835, 8582)
• K-1 Input - Select the K-1 from the list
• 1. Ordinary Income/Loss from Trade or Bus. Activities
  
  
  
  
• If the loss is entered in the Passive Income/Loss field, it is not deductible in the current year unless there is passive income entered elsewhere in the return.
• View Form 8582 from the View Results Menu. Worksheet 5 will display the calculation of any unallowed loss. Worksheet 6 will display the calculation of any allowed loss.
  
  
  
  

2. Is the Partnership a Publicly Traded Partnership (PTP)? - If there is an overall loss and the taxpayer did not dispose of their entire interest in the PTP to an unrelated person in a fully taxable transaction during the year, the losses are only allowed to the extent of the income. The excess loss is suspended and carried forward to use in a future year when the taxpayer has income to offset it. Because it relates to a PTP, it doesn't flow to Form 8582.

To verify that the return is marked as a PTP, from the main menu of the tax return (Form 1040) select:

• Income
• Rents, Royalties, Entities (Sch E, K-1, 4835, 8582)
• K-1 Input - Select the K-1 from the list
• Line L will be set to Yes if the partnership was marked as a PTP. Losses will only be deductible when the taxpayer has income to offset it, or when the taxpayer disposes of their interest in the PTP:
  
  
  
  
• If the partner disposed of their entire interest in the PTP to an unrelated person in a fully taxable transaction during the year, change Line F to Yes. The loss will be deducted from the taxpayer's overall income:
  
  

A loss from an 1120-S Schedule K-1 is not always deductible. Generally, losses from passive activities that exceed the income from passive activities are disallowed for the current year. If a loss is passive, it can only be used to offset passive income. If there is no other passive income in the return, the loss will not be deducted from the total income calculation. Instead, the loss will carry forward until it can be used to offset passive income. Form 8582 is used to calculate the loss carryforward.

Passive income and losses can come from a variety of activities, including equipment leasing, rental real estate, limited partnerships, S corporations, limited liability companies, and sole proprietorships in which the taxpayer has no material participation.

1. Is the loss entered as a passive loss in the Schedule K-1 Menu? This can be verified from the main menu of the tax return (Form 1040) by selecting:

• Income
• Rents, Royalties, Entities (Sch E, K-1, 4835, 8582)
• K-1 Input - Select the K-1 from the list
• 1. Ordinary Income/Loss from Trade or Bus. Activities
  
  
  
  
• If the loss is entered in the Passive Income/Loss field, it is not deductible in the current year unless there is passive income entered elsewhere in the return.
• View Form 8582 from the View Results Menu. Worksheet 5 will display the calculation of any unallowed loss. Worksheet 6 will display the calculation of any allowed loss.