When entering a Schedule K-1 (Form 1065) from a publicly traded partnership (PTP), i.e., Heading Information Line L, "K-1 from a Publicly Traded Partnership?" equals Yes, you may encounter a message after exiting the K-1 entry window:
Since this K-1 is from a PTP, overall losses reported on lines 8-12 cannot be greater than overall gain reported on lines 1 through 4.
Passive losses from a PTP can only offset passive income from the same PTP. In the Schedule K-1, if the sum of the gains reported on lines 1-4 is less than the sum of the losses reported on lines 8-12, the difference is unallowed and treated as a suspended loss.
Diagnosing the error
First, examine the entries in the K-1 1065 Edit Screen. You will see that the amounts on lines 8 through 12 total to a loss greater than the gain, if any, that is the sum of the amounts on lines 1 through 4.
In the K-1 1065 Edit Screen for a PTP, certain of the menu lines 8 through 12 have two entry fields to enter either the gain or the allowed and unallowed losses (or, in the case of Section 179, unallowed deduction), and in the K-1 edit menu you navigate to the Unallowed entry field when the amount entered in the Allowed entry field is zero or less:
Line | Description | Allowed | Unallowed |
8. | Net Short-Term Capital Gain/Loss .................................................. | ||
9A. | Net Long-Term Capital Gain/Loss ................................................... | ||
9B. | Collectible (28%) Rate Gain/Loss .................................................. | ||
9C. | Unrecaptured Section 1250 Gain .................................................... | ||
10. | Net Section 1231 Gain/Loss ........................................................ | ||
11A. | Other Portfolio Income (Loss) - REMIC Income ...................................... | ||
11A. | Other Portfolio Income (Loss) - Excess Inclusion .................................. | ||
11A. | Other Portfolio Income (Loss) - Section 212 Expenses .............................. | ||
11B. | Involuntary Conversions ........................................................... | ||
11C. | Section 1256 Contracts & Straddles ................................................ | ||
11D. | Mining Exploration Costs Recapture ................................................ | ||
11E. | Cancellation of Debt .............................................................. | ||
11F. | Section 743(b) positive income adjustments ........................................ | ||
11H. | Section 951(a) income exclusions .................................................. | ||
11I. | Gain/Loss from disposition of oil, gas, geothermal or other mineral properties .... | ||
11J. | Recoveries of tax benefit items ................................................... | ||
11K. | Gambling gains/losses ............................................................. | ||
11L. | Any income, gain, or loss to the partnership from a distribution under sec 751(b).. | ||
11M. | Gain eligible for sec 1045 rollover (stock purchased by partnership) .............. | ||
11N. | Gain eligible for sec 1045 rollover (stock not purchased by partnership) .......... | ||
11O. | Sale or Exchange of QSB stock with section 1202 exclusion ......................... | ||
11P. | Gain/loss on disp of farm recapture property & items to which section 1252 applies. | ||
11Q. | Gain/loss on Fannie Mae/Freddie Mac qualified preferred stock ..................... | ||
11R. | Specially allocated ordinary gain (loss) .......................................... | ||
11S. | Non-portfolio capital gain (loss) ................................................. | ||
11ZZ. | Other Income (Loss) ............................................................... | ||
12. | Section 179 Expense Deduction ..................................................... |
In the chart above, a menu line with the unallowed field grayed out means either:
- the item is only a gain, never a loss; or
- the item doesn't carry to any form or schedule from the K-1 edit menu due to there being more than one form possible, so it's up to you to (a) enter the gain or allowed loss directly where it belongs in the tax return and (b) keep track of any suspended loss.
Fixing the error
To fix the error, determine how much of the loss is unallowed. If the sum of the entries on lines 1 through 4 is zero or less, then all losses on lines 8 through 12 are unallowed and need to be entered in the unallowed entry field. Otherwise, only the same amount of loss on lines 8 through 12 is allowed and the remainder will be entered in the unallowed entry field.
For example, if the PTP K-1 reports ordinary income in Box 1 of $100 and a capital loss on line 8 of -$120, you'll make three entries:
- Box 1 - Nonpassive income of $100.
- Box 8 - Net short-term capital loss of -$100
- Box 8 - Unallowed net short-term capital loss of -$20
Tracking the unallowed loss
You will need to keep track of the suspended loss - it is not carried forward to next year's return on any form, schedule, or worksheet. This can be done, for example, using a return note attached to the tax return.
If all or some portion of the unallowed loss can be used next year, you'll enter a separate K-1 for just that loss, entering the allowed portion in the Allowed entry field.
Additional Information:
IRS: Instructions for Schedule K-1 (Form 1065)