Indiana passive loss carryforward

Forum|Forum|3 years ago
December 21, 2022
7 replies
105 views

I am a non-resident of Indiana. I receive a K-1 from a partnership whose sole activity is in Indiana. My K-1 reports only Box 2 income (loss). This is a PASSIVE activity for me. And, I do NOT participate materially.

In 2020, I had a big negative number in Box 2 (i.e. a passive loss) which got reported on 2020 IRS Form 8582 as a passive loss to be carried forward into 2021. My question is now about my 2021 Indiana return.

My issue is that TurboTax fails to reflect this carryforward amount in my 2021 Indiana State Return. This is despite the fact that it automatically prepares 2021 IRS Form 8582 correctly and consistently with the carryforward loss from 2020. (There's no issue with my federal return, only with my Indiana return.)

It is imperative that I incorporate this loss carryforward into my 2021 Indiana State Return because the K-1 issued by the partnership shows a small positive number in Box 2 (i.e. income) for 2021. If I don't incorporate my loss carryforward, it will mean that I will need to pay 2021 income tax to Indiana on my Box 2 income. However, my loss carryforward amount is several times greater than my 2021 Box 2 income meaning that their sum is still a loss, meaning that I really shouldn't be owing any 2021 income tax to Indiana.

I have read the Indiana instruction booklet named IT-40PNR, but it doesn't contain any instructions pertaining to processing passive loss carryforwards. I have also searched the entire booklet for the words "carryforward", "carry forward", "carryover", and "carry over" and haven't found anything relevant to my case.

I believe that the state of Indiana does honor passive loss carryforwards, just like the IRS. (But I may be wrong. I have found online documentation showing that Indiana does honor "operating loss carryforwards", so I presume they would also honor "passive loss carryforwards".)

I'm trying to figure out how to enter these passive loss carryforwards MANUALLY under Forms View in my Windows desktop version of TurboTax.

Schedule A, Form IT-40PNR itself has instructions at the very top which says do NOT enter any operating loss carryforwards on line 20B. So, this choice is out.

Another possibility seemed to be Schedule C (Deductions), line 11. However, the aforementioned instruction booklet's instructions for Schedule C, line 11 rule out this line as a possibility too (because there's no "code" that pertains to passive loss carryforwards from prior years).

Another possibility seemed to be Schedule C, line 8 (net operating loss deduction), but the state of Indiana dismissed this after processing my original return which I had filed on time. (I intend to file an amended return now.)

*** The only remaining option seems to be Schedule A, Section 2 (Adjustments to Income), line 34 (Other). ***

The aforementioned instruction booklet's instructions are somewhat vague on this, but I could argue that this is the right spot.

I would like to enter in column B of Line 34 the amount that I'm reading off from my 2021 Form 8582, Part V, column C and which has been automatically prepared by TurboTax. This represents my passive loss carryforward amount into 2021. I am sure about the amount of the carryforward loss. What I am NOT sure about is where to enter it in my Indiana State Return (and wonder why TurboTax doesn't handle this automatically).

Additionally, I could also attach federal Form 8275 (Disclosure Statement) where I would explain my situation.

Any ideas?

Thank you.

Best answer by Rick19744

You are going to have to adjust your return manually, as TT will not be able to handle this automatically.

In general, Indiana follows federal; and passive activities is one of those areas.

Indiana does not generate its own passive activity loss schedules.

You don't mention what your 2020 Indiana return looked like; I assume you most likely didn't prepare one with the large passive loss?

For 2021, you are going to need to look at your federal 8582 to see what is happening with your K-1 activity related to this Indiana K-1 activity; you don't mention if you have other passive activities.

Then you will need to manually adjust for this on the IT-40PNR Schedule A.

When the activity begins to generate income, I assume that this will be netting to zero until all of the 2020 passive losses are utilized. Once this occurs, then you will begin to report the income.

In my mind I believe you should file the return with a schedule attached which starts with the 2020 passive loss, any 2021 passive income and the net amount; which as stated earlier most likely nets to zero in 2021.

While this most likely will preclude you from efiling the Indiana return, I believe including the documentation on how you arrive to the net amount is important.

If you are not comfortable with doing the above, you should consider utilizing a tax professional.

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**Answers are correct to the best of my ability but do not constitute tax or legal advice.

Rick19744

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