K-1 “Describe the Partnership” section. Can someone help me better understand when to check the box "I have passive activity losses carried over from last year"?

[fvargas]

Note: I posted this in the community section, but just received information on how to contact Turbo Tax, not an answer to the question. Please help. 🙂

I invested $60K in a company. They have incurred losses: ($6505) in 2021 and ($2884) in 2022 (Schedule K-1, Part III, Box 1). Someone told me that I would not check the "I have passive activity losses carried over from last year" until my basis turns negative. My basis is currently $39,330 (line 16 of Partner's Basis Worksheet supplied with the K-1). Is this correct advice OR do I check the box and consider the ($6505) the passive activity loss to be carried over? Any help would be much appreciated.

[marctu]

@fvargas thank you for the question.   While basis is an important consideration, it does not impact whether you have a passive activity loss carryforward.   You would have a  Form 8582 for 2021 if you have a passive activity loss carryforward, so you need to look at your 2021 tax return.  If so look at it and see what the carryforward loss is for the entity generating the K-1 for 2021 and 2022, then you would answer that you do have a passive loss carryforward and enter it.  You may also have an AMT carryforward and a QBI carryforward, so look carefully at the entirety of the 2021 tax return and then enter them as well.  

All the best,

Marc T.

TurboTax Live Select Time Tax Expert

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[fvargas]

Thank you, @marctu . Yes, I understand you are saying to carry forward from the prior years per Form 8582, but my question is how to know if you have a passive activity loss to begin with - where would this be listed or how is that defined? My information on 2021 tax return is only as correct as the data input and that is my concern. Allow me to clarify:

• 2019: July 2019, I invested $60K in a business.
• 2020: First year to receive a K-1. Per K-1, business losses of ($6727). Per supplemental "Allocation of Losses and Deductions" included with K-1, "Allocable Losses & Deduction in Current Year" in column e are listed as ($6727). My 2020 has return has worksheet 8582 and "Part I 2020 Passive Activity Loss" Line 4 has the ($6727) loss listed and then on "Part IV Total Losses Allowed" it says $0 on Line 16. At the end of Form 8582 under "Worksheet 7 column e" the Total is ultimately $0.
• 2021: Follows exact same format as 2020, but with 2021 losses of ($6506). Tax return includes form 8582 and worksheet ultimately shows Total Losses Allowed $0.
• 2022: Follows exact same format as 2021, but with 2021 losses of ($2884). Tax return includes form 8582 and worksheet ultimately shows Total Losses Allowed $0.

Is this where the passive activity losses would be listed - per 2021 & 2022 Form 8582 "Part VIII  Allowed Losses (c) Allowed Losses" (at the end of the form)? 

Additionally, why are these losses not "an allowable passive activity loss"?

[RSUMan]

The initial question is were the passive losses used in the prior year.  If you had significant passive income in 2021 and 2022 (for example, $10,000 of interest and dividends), then the partnership passive losses would be offset against that passive income.

I am assuming that the passive losses were not "absorbed" in 2021 and 2022.  If so, then you do have passive losses that carryover to future years.  Your 2021 forms should then include Form 8582 Passive Activity Loss Limitations and the unused losses should roll forward each year in the TurboTax software.

The basis issue discussed by your friend gets at a different issue:  you can only write off losses to the extent of your basis in the partnership.  Your total accumulated passive activity losses that you can use to offset passive income is $60,000 (which equals the amount you invested in the partnership).

[fvargas]

@RSUMan So are the losses I listed the passive activity losses? The ($6727), ($6506), and ($2884)? 

Yes, I did have some passive income in the form of interest and dividends, but they did NOT exceed the loss amounts each year. Therefore, I would have thought the loss would have decreased due to this offset, but there should still be a loss. 

Why does Form 8582 say that the aforementioned losses are not an allowable passive activity loss? I imagine this form is generated after being asked questions in Turbo Tax. I simply completed the K-1 information exactly as listed. Is it a possible glitch? 

[RSUMan]

Hopefully, you can generate a PDF copy of your 2022 tax return with all worksheets.

Line 11 in Part III of Form 8582 shows "Total losses allowed from all passive activities for 2022."

The unallowed losses should show up in Part VII Allocation of Unallowed Losses.

There should be a carryover worksheet in the stack and the unallowed Passive Activity Losses should show up there to be carried forward to 2023.

Are you seeing the use of the losses when you go through line 1, 2, and 3 in Part I of Form 8582?  Since you had passive income, the partnership loss should have been partially utilized in 2022.

[fvargas]

@RSUMan Thank you, that was very helpful.

• Yes, I always save a full copy with all worksheets and have all three years open. 
• Line 11 in Part III of Form 8582 shows "Total losses allowed from all passive activities" is $0 for 2020, 2021, and 2022.
• The losses I do have ($6727), ($6506), and ($2884) are listed as Part VII Allocation of Unallowed Losses in each of the three years. 
• No, there is no use of the losses when I go through line 1, 2, and 3 in Part I of Form 8582. I apologize as I believe I may have misunderstood your question - the income and dividends I earned were personal and not related to the business that issued the K-1 at all. The entity issuing the K-1 has no passive income and therefore none of the loss was offset.
• If these are all "unallowed losses", am I able to carry them over? OR, are only allowable losses (of which I have none) eligible for carry over? If unallowed losses can be carried over, perhaps my mistake was in Turbo Tax under the "Describe the Partnership" heading and in 2021 I should have checked the box affirming "I have passive activity losses carried over from last year" and then I would have been able to enter the ($6727) loss from 2020 where it all began and do the same thing for 2022 with the ($6506) loss from 2021. Am I understanding it correctly?

[RSUMan · Accepted solution]

The unallowed losses are all carried over.  You can file an amendment to get the loss carryover properly reflected.

If the partnership has income in the future or is sold at a gain, you will want those loss carryovers to be available to offset the income or be used to reduce the gain. 

[fvargas]

@RSUMan:

Do I amend both 2021 and 2022 separately? I imagine I would then check that box affirming the losses to be carried over and enter them accordingly, correct? 

Thank you SO MUCH!!

[RSUMan]

You may be able to catch up by just amending 2022.

My recommendation is to call in to our Tax Advice queue (which gives the Expert a greater view of the 2022 and 2021 filings) and discuss with a CPA, attorney, or enrolled agent how to get the issue fixed.

[fvargas]

@RSUMan 

Is the "Tax Advice queue" part of this "Ask the Experts" one day event OR is it something I can call into anytime? Is it included with my Premier version or do I have to upgrade?

Also, I just now realized I could have uploaded screenshots...ugh, sorry!

[RSUMan]

Our customer support phone number is 1-800-4INTUIT or 1-800-446-8848.

Not sure which product you bought; we generally just help you because we connect you to Experts and we are a great company!