Can I offset passive losses with portfolio income

[MichaelDC · Accepted solution]

No.  Passive losses are only offset by passive income, not income from stocks, bonds, interest and dividends. There are limited partnerships that might pass passive income through a K-1.

According to the IRS:

• Passive: Rentals and businesses without material participation. A limited partner is generally passive due to more restrictive tests for material participation. As a result, limited partners will generally have passive income or losses from the partnership 
  

Income and losses from the following activities would generally be passive:

• Equipment leasing
• Rental real estate (with some exceptions)
• Sole proprietorship or farm in which the taxpayer does not materially participate
• Limited partnerships with some exceptions
• Partnerships, S-Corporations, and limited liability companies in which the taxpayer does not materially participate
• 
  

• Nonpassive: Businesses in which the taxpayer materially participates. Also, salaries, guaranteed payments, 1099 commission income and portfolio or investment income are deemed to be nonpassive. Portfolio income includes interest income, dividends, royalties, gains and losses on stocks, pensions, lottery winnings, and any other property held for investment

Income and losses from the following activities would generally be nonpassive:

• Salaries, wages, and 1099 commission income
• Guaranteed payments
• Interest and dividends
• Stocks and bonds
• Sale of undeveloped land or other investment property
• Royalties derived in the ordinary course of business
• Sole proprietorship or farm in which the taxpayer materially participates
• Partnerships, S-Corporations, and limited liability companies in which the taxpayer materially participates
• Trusts in which the fiduciary materially participates

If you have additional questions or details regarding this, please feel free to post in the comments for further clarification.

[lion17]

Can I claim car mileage and tolls for an Equine LLC of which I am a limited partner?  I go to the auctions, the horse farms to promote the business, the racetrack when the horses are running and the barn to see the animals?  If so, does this make it a passive business expense that can be claimed on Schedule E?

[Zobrelaroca]

Base from your answer.

If am owner S corp and get K1 nonpassive income and lose money on my portfolio (Stocks), can I offset my k1 income with stocks losses? 

[RobertG]

Generally, a partner may not deduct the expenses of the partnership on his or her individual income tax return, even if the expenses were incurred by the partner in furtherance of partnership business.

However, an exception applies when there is an agreement among partners, or a routine practice equal to an agreement, that requires a partner to use his or her own funds to pay a partnership expense.

You only can deduct unreimbursed expenses on Schedule E that are trade or business expenses under section 162. Don't report unreimbursed partnership expenses separately if the expenses are from a passive activity and you are required to file Form 8582.  (IRS Publication 587)

Here's how to report unreimbursed partnership expenses in TurboTax.

• You get to it when entering the K-1 information.
• As you go through the screens entering your information, you will eventually come to a screen entitled ‘describe your partnership’.
• Check the box that asks if you are 'required to pay supplemental business expenses'.
•  The next screen is 'Unreimbursed Partnership Expenses' and you check the 'Yes' box.
•  You can then enter your unreimbursed partnership expenses.

To deduct home office expenses as an unreimbursed partnership expense, see IRS Publication 587, Business Use of Your Home, Deducting unreimbursed partnership expenses.

@lion17

[RobertG]

You can only offset K-1 income with stock losses up to a point.

Capital losses can only exceed capital gains by $3,000.  The remainder is either carried over or used against capital gains in subsequent years.

@Zobrelaroca