K-1 income is passive but TT reporting it as non-passive

[mootzie]

What am I doing wrong that TT is reporting my K-1 income as non-passive instead of passive on Schedule E? I did check the box that all of my investment is at risk. Did that have anything to do with it?

[PatriciaV]

You may have indicated that you materially participate in the partnership. If that is not the case, return to the beginning of the K-1 entry and work through the screens. On the page "Did you participate?" answer No.

[mootzie]

I never had a question that asked if I materially participated. I think it might be because I checked the "other" box when it asked what type of activity - there was nothing in Box 1, 2, or 3 on my K-1. Nowhere did I see where Turbo Tax asked me if I materially participated in the business so this must be where TT got the info from that put me in a non-passive category?

[PatriciaV]

In that case, go back and check Box 1 and answer the material participation question when it appears. Then go back and uncheck Box 1.

[mootzie]

If I do the work around like you just said, will it be a problem if in past years it was reported as non passive and now as passive? Shouldn't TT have put me in the right category, ie asked the question, without my having to do this work around? We should have caught it in past years, but relied on TT to do it correctly.

That being said, I remember reading somewhere on the IRS website that at the moment guaranteed payments including those for the use of capital are considered non passive. Correct me if I'm wrong.

[PatriciaV]

Yes, guaranteed payments are nonpassive and subject to self-employment taxes. If you have reported the income from this investment as nonpassive in the past, continue to do so. 

Read more here: IRS Pub 541 Guaranteed Payments

[mootzie]

Interesting, though, that on my mother's tax return TT put the guaranteed payments for capital as  non passive but on my tax return TT put my guaranteed payments for capital under passive.  Everything on both of our K-1s is the same, and I entered everything the same so why the difference?

[DawnC]

Something on the forms or worksheets on your return is different from what is on your mom's return.  You look to be using the desktop software, so you can print or view the forms in Forms Mode to see the differences.