Nonpassive loss allowed Sch E Part II entry

[bustadimes]

I received both a 1065 and 1120S and on each, included amounts (approx $2k each) of interest paid by shareholder for the buy in of the partnership/Scorp I joined. I had a CPA complete 2020's return as it was my first year in the group. These items were listed under box 20AH on the 1065 and box 17 AD on the 1120s. In 2020, the CPA called this Nonpassive loss allowed, reported on Sch E Part 2 under line 29b. 

I cannot for the life of me figure out how to get this into TT. When I enter these, it gives me a pop up window suggesting that I need to enter this in elsewhere as it's not listed in any sort of drop down option for these two boxes on the K1 reports. 

I looked under the investment interest expenses but this seems to adjust 8960 and/or in future year's returns and I don't think that's right. I understand that eventually the line item 32 on Sch E part II will flow to 8960 4a and will also be listed on my Sch 1 line 5 so I need to be able to input this to Sch E. 

Any/all help appreciated

[PatriciaV]

Both of the Schedule K-1 box codes you list are used for "Other Information," which is why you may not see your specific item on the drop-down list. It appears these amounts were included in the Income/Loss from the investment in the prior year. But without more guidance, the exact coding is not clear.

You may need to contact the company that provided the K-1s if the supplemental information did not you give you specific instructions for where these items should appear on your 1040 return.

[bustadimes]

Thanks for the reply. I updated my post for clarifications. It listed them pretty clearly in the supplemental information as interest paid by me as part of the partnership/shareholder buy in. The amounts roughly add up to $7k and I’m hoping to find the right place to specify to TurboTax where this goes.

[PatriciaV · Accepted solution]

After you enter Form 1120 S  Box 17 Code AD, you should be given a page to enter a description and amount. That page also advises the TurboTax doesn't report this entry on your return.

Continue past that page to one titled "Other Situations." If you check the box for "I personally paid interest on debt...", a pop-up box will appear where you can enter the amount of interest you paid. The amount you enter here will be included as a deduction against Ordinary Income for the K-1 and be included in nonpassive income(loss) described as "Interest Expense" on Schedule E page 2, Line 29b.

Form 1065 Box 20 Code AH is entered in a similar fashion, except you check the box for "I am required to pay supplemental business expenses on behalf of this partnership/LLC for which I am not reimbursed." A later page will provide a box for "Interest Expense to Finance Purchase of Partnership Interest." This amount will display in the same manner as for the S-Corp.

Please note the rules regarding this interest:

The IRS will let you treat the interest as fully deductible business interest on Schedule E if all of the following conditions are met:

1. The taxpayer materially participates in the partnership’s or S Corporation’s business operations.
2. The partnership’s or S Corporation’s assets are used solely in conducting an active trade or business and not for passive or portfolio activities.
3. No debt-financed distributions to partners or shareholders have been made.

Such qualifying interest should be reported on Part II of Schedule E. Per IRS Notice 88-37, the interest expense should be reported on a separate line and identified as “business interest” with the name of the pass-through entity indicated. As a bonus, if the interest is related acquisition of a partnership interest, it would presumably also reduce self-employment (SE) income and therefore reduce SE tax.

Source: Champ Rick19744

[bustadimes]

This is great. Thanks so much for pointing these out to me PatriciaV!