K-1 Box 1 basis limitation

[begr]

I have a question regarding the Note (Do not enter a loss amount that is more than your basis) in the interview question for K-1 Box 1 - Ordinary Income or Loss.

Which basis should be used here? I assume it is the end-of-tax-year adjusted basis that I am responsible for maintaining?

I am a passive partner in this LLC with all of my investment at-risk. Assume I have a calculated year-end basis of $1000 and K-1 Box 1 loss of $3000. I would enter $1000 for the K-1 Box 1 - Ordinary Income or Loss in TurboTax, correct? What does TurboTax do with the remaining $2000 loss? Does this $2000 not get suspended due to the basis limitation?

[AliciaP1]

Yes, the adjusted basis you track is what you need to enter.  So, in your example, you would enter the $1000 loss in box 1 and on your 2023 tax return (next year) you will input that you have a $2000 passive loss carryover from 2021.

[begr]

Thank you Alicia. Your answer is helpful and is getting me closer to understanding my real issue.

Assume the following scenario:

I invest $5000 in 2020 in an LLC as a passive member with my entire investment at risk. Assume my share of LLC ordinary losses is $4000 for years 2020-2022 and the LLC is terminated in 2022.

Year    Year-end adjusted basis  K-1 Box 1   Box-1 in TurboTax   Allowed loss   Disallowed loss (carry forward)

------     ---------------------------------   -------------   -------------------------   ------------------   --------------------------------------------

2020   1000                                    -4000          -1000                        1000                 3000

2021    0                                          -4000          0                                0                        4000

2022    0                                          -4000          0                                0                        4000

Since the LLC terminated in 2022, I can now realize all passive losses. When I add up all the allowed and disallowed passive losses, the total is $12000. I believe this number will show up in Schedule 1, line 5 (via schedule E).

My real question is this: Is it possible for my LLC total loss (sum of all passive losses = $12000) to be greater than my total investment in this LLC ($5000)? Is there some other loss limitation that I'm (and TurboTax) is missing?

[AliciaP1 · Accepted solution]

No, there is no other limitation.  You can deduct the full amount of any suspended passive losses only in the year of disposition and only because your entire partnership interest was disposed of.  

Per the IRS:

• Generally, you may deduct in full any previously disallowed passive activity loss in the year you dispose of your entire interest in the activity.

@begr 

[begr]

Thanks again Alicia. I will move forward with your suggestions.