K1 does not make a difference

[Juancho101]

Hi,

I have a k-1 from a real statel company of which I own a 30%. 

The company main activity is real state rental

The company had losses this year and I received a k1

All my investment is "at risk" and is much greater than the losses

When I enter the K1 information in Turbotax, the summary of my income shows this line (schedule K-1) as "0" and it does not make a difference on my taxes.  Since this is a pass through entity should't I see a "loss" equal to the amount in the K1 form?

Thanks

[DawnC · Accepted solution]

Not necessarily.  Box 2 on Schedule K-1 reports rental income (loss) which is generally considered to be a passive activity.  Losses from passive activities can only be used to reduce other passive income (most commonly income reported on Schedule K-1 for partnership and S-Corporation investments).  However, there is an exception for rental losses that allow a loss for active participants up to $25,000.  This is eliminated if your modified adjusted gross income exceeds $100,000 (or $75,000 if married filing separately), however.

Any unused passive losses carry over to future years to offset future passive income.  When your interest in the partnership is sold or disposed of, you can take all losses carried forward in the year of disposition.

Please refer to the link below for more information regarding passive loss limitations specific to rentals.

Passive Activity Limits

[convertibledreaming]

@DawnC ,

I have a -$125,000 loss from a LLC K1, but  $72,000 cash income from freelance/property management work I've done.  No matter HOW I enter in the cash bank deposits, I'm still getting taxed the full amount.  How do I get my K1 to pass through and offset the gains I had in cash?  I want to be honest, but it kicks in a $10,200 tax bill if I report the deposits.  Why doesn't the extreme loss of my 3 member LLC still show a loss for my TOTAL taxable income?

BTW- The loss in from box 1 on the K1.  It's not in relation to rental properties. It's my husband and I doing a VERY SMALL car repair/dealership.  The cash that I'd like to report is from our number one customer who ended up having us repair his 3 properties and all vehicles. 

I've tried to use "bank statement" to add the amount and choose "freelance" work, but the K1 loss doens't counter balance that.  I removed that entry and tried to enter in a "business" in our own name/address in order to create a schedule C, but that didn't offset the K1 loss either.  

[DawnC]

K-1 losses have layers of limitations.  The basis limitation is a limitation on the amount of losses and deductions that a partner of a partnership can deduct. The basis limits are the first of three limitations that are applied to Schedule K-1 losses and deductions. After the basis limits are applied, the At-risk limits (Form 6198) are applied.  If losses are allowed by the basis and at-risk limits, the passive limits (Form 8582) are applied, if applicable.  All of these questions can be answered during the K-1 entry process.   

You must have a basis in the partnership; you must be at-risk in the business, and you must be an active participant in the business to have your K-1 losses offset other income on your tax return.  

@convertibledreaming

[convertibledreaming]

@DawnC 

thank you! I found out that the way I entered in my income was triggering "self employment tax" on a schedule 2.  All I need to know is how to enter cash deposits that DONT require the self employment tax.  (It seems very counter-intuitive that the feds would ask for $10k+ when my AGI ended up at -$55k.)

I tried "freelance" with adding income via bank account.  After removing that I tried "home business" in my personal name which triggered the schedule C.

Is there any other way to show the deposits without getting the self employment penalty?

[DawnC]

If you are not an employee and have income from doing work in a business, it is self-employment income.  If some of those 'cash deposits' are for the K-1 business, then those amounts should be included with that K-1 which will reduce the loss on the K-1.   However, if the income is for a separate business, it should be reported on a business (Schedule C) form.   If you have expenses to offset the income, those expenses can go on that same Schedule C which will reduce your business income and related SE taxes.    

I think there may be some confusion with this income.  If it is income from the K-1 business, the K-1 should be corrected to include the income.  If it is for a separate business, the income still needs to be reported and if you did work for the income (sounds like you did), the income is taxed as self-employment income.  

The SE tax is not a penalty.  It is your portion of social security and medicare taxes.  Normally your employer pays half and you pay the other half.  But as a self-employed taxpayer, you pay both portions.  Only business expenses related to that business can reduce profits and SE taxes.  Each business activity is treated separately for the purposes of calculating the SE tax.  However, all of your self-employment activities will be netted on Schedule SE so you pay the minimal SE tax.   Box 14 (code A) needs to have an entry for SE income (or loss) to be included on Schedule SE.  

What is the self-employment tax?

@convertibledreaming