Indiana passive loss carryforward

[taheri1]

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.

[tagteam]

@Mike9241 

[TomD8]

-deleted-

[Rick19744 · Accepted solution]

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.

[taheri1]

@Rick19744,

Thanks for your reply! To answer your questions,

I did file a 2020 Indiana return and it did show a large passive loss.

I do have other passive passive activities, but do know how to isolate the one pertaining to Indiana from my IRS Form 8582 for 2021. As previously mentioned, I don't doubt the AMOUNT of the passive loss that needs to be carried forward from 2020 into 2021 on my Indiana return.  And, this passive loss carryforward amount EXCEEDS my 2021 income, meaning that I will need to carry the difference forward to 2022.

The question is, where on IT-40PNR Schedule A would I enter the amount of the passive loss being carried forward? Would it be on line 34? No other line seems to make sense.

Schedule A is available here: https://www.in.gov/dor/tax-forms/2021-individual-income-tax-forms/

If there's any uncertainty as to whether line 34 is the right place, I could also attach federal Form 8275 (Disclosure Statement) to beef up what I've done.  My home state allows me to use this form to provide additional explanations because it doesn't have its own such form, but I'm not sure about Indiana.

In summary, I don't have an issue conceptually. My only issue is about the logistics.

Thanks again.

[Rick19744]

As stated previously, Indiana starts with federal and then makes any appropriate adjustments.

So if you had a federal passive loss, none of this would be reflected on the Indiana return.

There may have been some supplemental statement reflecting the passive activity, but nothing on Schedule A since you are not active and all was carried forward.

Your reply is confusing as you state "...do know how to isolate the one pertaining to Indiana....."?

And then you state "I don't have a problem conceptually, just the logistics"?  These two statements don't seem to mesh.

Since this is from a partnership, the activity will be reflected on line 13 in columns A and B; and since you have other passive activities the two columns will not agree.

Form 8275 is definitely not a form you would be using in this instance.  I wouldn't be using this form; I would be attaching a separate statement.  This form, used at the federal level, sets off bells and whistles as you are telling the IRS regulations.  This is a rare form to be completing.

In summary:

• Your response seems contradictory to me
• Indiana Schedule A line 13 is where the passive activity is reported; column A or B depending on what state the activity is to be reported to 

[taheri1]

Perhaps my understanding is not as good as I'm thinking. Here's my thinking.

I don't wish to modify the entry in Schedule A, line 13, column A as entered automatically by TurboTax because that's the federal amount representing "income or loss from partnerships." If I adjust it, then the amount on line 21, column A will no longer match my federal AGI  as it appears on IRS form 1040, line 11.

I believe (and I may be wrong) that Schedule A, line 13, column B ought to reflect ONLY 2021 income from the Indiana partnership and NOT any passive loss carryforwards. This is how TurboTax has populated this cell.

I'm guessing (and I may be wrong) that I should manually enter the Indiana passive loss carryforward amount in Schedule A, line 34, column B. (You seem to be suggesting that I should lump it together into line 13, column B.)

As to the amount of this passive loss, I believe that I can read it off of my IRS Form 8582 for 2021, from Part V, column C (which is automatically being attached to my Indiana return) but with the following caveat. In this column, I have not one but 3 rows of  data. Only one single row pertains to Indiana. So, that's the amount that needs to be used.  

By the way, my IRS Form 8582 for 2021, Part V, column A, for the Indiana row, contains the same amount as appearing on Schedule A, line 13, column B. This suggests that I'm on the right path.

I'm also guessing (and I may be wrong)  that because I'd be making a manual entry on Schedule A, line 34, column B to reflect the Indiana passive loss carryforwards, that I ought to enter the analogous FEDERAL amount on the same line but in column A. The specific amount to be entered here would be read off from IRS Form 8582 for 2021, from Part V, column C, the sum of all rows. 

Ok, I will refrain from including Form 8275. Instead I will attach a personal statement. 

[Rick19744]

Final responses:

• I am not recommending that you adjust Schedule A line 13 column A either.  It is column B that may need to be adjusted.
• Having said that, I can't see your return to understand what TT is reflecting; or how they are arriving at the amounts being reported.
• These types of multi-state scenarios with passive activity carryovers, are not the usual return that TT is focused on.  As a result you will need to adjust manually.
• I would make the adjustment on line 20 column B. 
• As recommended previously, I would then include a statement to track your Indiana passive loss carryover from 2020, what was utilized in 2021, and then carried over to 2022; unless the statement you are referencing is arriving at the correct amount.
• Don't make any adjustments to column A.  TT should be handling this correctly.
• The only statement that you need to attach is the explanation of the adjustment on line 20 column B; which is utilizing the Indiana passive loss carryover amount available.  Nothing more.