IRS Schedule E Part II concerns income or loss the taxpayer received from partnerships and S corporations. Line 27 in Part II asks this yes/no question: "Are you reporting any loss not allowed in a prior year due to the at-risk or basis limitations, a prior year unallowed loss from a passive activity (if that loss was not reported on Form 8582), or unreimbursed partnership expenses?"
This question needs to be answered Yes when the return includes any of the following items from a partnership or S corporation reported on Schedule K-1:
- Unreimbursed partnership expenses.
- An unallowed loss in a prior year due to at-risk or basis limitations.
- An unallowed passive loss in a prior year that was not reported on Form 8582.
By default, the line 27 question is answered No. To answer it Yes, from the Main Menu of the tax return (Form 1040) select:
- Income
- Rents, Royalties, Entities
- Prior Year Loss Not on 8582 or Unreimbursed Expenses - Answer the question Yes.
Unreimbursed Partnership Expenses
See here for information on entering unreimbursed partnership expenses in the individual tax return.
Unallowed Prior Year Loss Due to Limitations
The prior year unallowed loss that is now deductible is entered on a separate K-1 entry line from any other K-1s received.
From the Main Menu of the tax return (Form 1040) select:
- Income
-
Rents, Royalties, Entities
- K-1 Input - Select New, then select the type of entity.
- ID Number - Enter the EIN for the entity.
- K-1 Owner - For a MFJ return, select Taxpayer or Spouse.
- [Entity type] Name - Enter "PYA".
- U.S. Address - Enter the entity's address.
After selecting Ok, in the K-1 Edit Screen select 1. Ordinary Income/Loss and enter the allowed portion of the loss as nonpassive.
Unallowed Passive Loss not Reported on Form 8582
The prior year passive unallowed loss that is now deductible is entered on a separate K-1 entry line from any other K-1s received.
From the Main Menu of the tax return (Form 1040) select:
- Income
-
Rents, Royalties, Entities
- K-1 Input - Select New, then select the type of entity.
- ID Number - Enter the EIN for the entity.
- K-1 Owner - For a MFJ return, select Taxpayer or Spouse.
- [Entity type] Name - Enter "PYA".
- U.S. Address - Enter the entity's address.
After selecting Ok, in the K-1 Edit Screen select H. Actively Managed Passive Loss Carryover and enter the allowed portion of the loss as a positive number.
Additional Information: