Should a passive loss reported on a K-1 offset 1099-Misc income?

[rhartmul]

I have a sizeable passive loss reported in Line 1 of a prior year K-1 (Form 1065) tied to a PE holding. Before I even enter this year's (which I don't even have yet) K-1, TurboTax seems to automatically offsetting this year's 1099-Misc income. In other words, the K-1 entry (which is empty) shows a negative number that exactly offsets my 1099-misc total. My 1099-misc income is tied to structured investments that generate options premium (complex straddles) in my standard investment account, which I believe would be consider active income. Am I understanding the tax treatment incorrectly, or do I need to mark something differently in either the K-1 or 1099-misc interview?

[ThomasM125 · Accepted solution]

A form 1099-MISC would report either rental, royalty or other income. The default treatment of all of these types of income would be passive income. Income from straddles would be better entered as investment sale income where it will be considered investment income that is non-passive income. 

You enter income from straddles in the Wages and Income section of TurboTax, then Investments Income, then Contracts and Straddles:

You can enter the Form 1099-MISC so it will correspond with the copy the IRS receives. You then need to enter a negative amount to "other income" to cancel out the income as follows:

1. From the Federal menu in TurboTax find Wages and Income 

2. Find Less Common Income

3. Choose Miscellaneous Income, 1099-A, 1099-C

4. Choose Other Reportable Income

5. Enter a description of the adjustment and the amount as a negative number

[ryhartmuller]

Using the online program, TurboTax seems to want straddles reported as a sale.

So using round numbers, if my total 1099-MISC 3. Other Income is $40,000, should I just enter any acquisition date, and sale date, cost basis as 0, and sale price as $40,000?

In my actual brokerage statements, the acquisition and sales are listed, though the cost basis and sale price are the same, so they show as netting out to zero.  Could I simply adjust the sales proceeds with the income?

[rhartmul]

Thanks.  I was able to do this, though initially, TurboTax did not show the negative Other Income entry canceling out the passive loss in the K-1 section.  After playing around a bit (not even sure what I did), it eventually did so, so all is good.

I've noticed that more and more of my brokerage statements, including those for my children, are including 1099-MISC Other Income, so hopefully TurboTax will make handling this more straightforward.  I guess it's not a widespread problem, as the issue only shows up with K1 passive income/losses.