I filed my taxes 2 ways - one that was joint with my spouse and also tried Married filing seperately. In either case, I had a tax liability in the thousands. I then got my schedule K-1 ( not publicly traded partnership) that indicated there was an operating loss ( Box 1) in the thousands and that was incidentally more than my current liability. I immediately assumed my liability would drop considering my partnership losses and entered the K-1 details into TT only to find that it did nothing to my liability. How is this possible?
If you're a passive partner, losses will be suspended until you either a) sell the partnership of b) have income from the same type of passive activity. If you look at the K-1 worksheet, you should see that the losses show up as suspended.
Is there any other reason that this could be happening? Because I'm facing the same issue of K1 losses not reducing my tax liabilties even though I'm not a passive partner.
I have this same part. NOT a passive partner and yet my total tax liability barely went down despite a $24,000 loss on the K1
You have to be At Risk for the amount of loss in order to be able to deduct it. You will see a question about that when you enter the K-1 schedule if you have a loss. At risk means you have money invested in the ownership of the business that you haven't used up through loss deductions.
For instance, if you pay $10,000 for your partnership interest and deduct $5,000 of losses from it, you only have $5,000 at risk, so the following year you can only deduct $5,000 of losses.
It is also possible that the partnership is a passive activity itself, as would be the case if it was involved with rentals. That can also limit your ability to deduct losses.
Using your example, if you have an investment of 10K and only losses of $4K, is your recourse liability (at risk) $6K (your remaining balance) or the $4K (your actual loss)?
A Recourse Liability is a debt owed by the partnership that the partners can be held responsible for if the partnership does not pay. You have a share of a recourse liability owed by the partnership but it does not affect your basis in the investment.