Form 8990 for Dummies

[wstewart]

Looking for help from some of the more knowledgable members here, like @nexchap and others.

I feel a bit stupid in admitting this, but I have wrestled with Form 8990 for a while ... and I have gotten to a place where I think I understand it, but I would like to confirm that my understanding is correct.

Background: I am an investor in a PTP, which is where my Form 1065 K-1 Box 13K item comes from.  No other business interest expense at all; only the items reported by the PTP.

As I understand it, because I am a small business taxpayer - meeting the gross receipts test of less than an average of $25 million over the last three years, I am not subject to section 163(j) - and thus I do not have to complete Part I of Form 8990 - but I do have to file Form 8990 to track the excess business interest expense.  So, I only have to complete Schedule A (lines 43-44) for this purpose. So far, so good (I think).

Now, as the PTP reports current year excess taxable income or excess business interest income (Schedule A, lines 43f and 43g), this will move this EBIE to the "treated as paid or accrued" category (Schedule A, line 43h).  I understand that; my real question is, what happens next?

As I understand it - but the IRS doesn't really come out and say this directly anywhere in the Form 8990 instructions or documentation - once this EBIE hits line 43h, it joins the rest of the accumulated losses for that specific PTP, subject to the at-risk and passive activity limitations.  But, the IRS wants a reconciliation of these Schedule A, lines 43f-h amounts before the EBIE in 43h is "released" in this fashion (my term, not the IRS's). For "small business taxpayers" who are only PTP investors, this seems like a large exercise in futility, although I understand how section 163(j) makes the EBIE different from other general PTP losses and expenses.

I should note that the IRS points to this outcome in the Form 1065 Schedule K-1 instructions, in the specific instructions for Box 13, code K: 

"Code K. Excess business interest expense. If the partnership reports excess business interest expense to the partner, the partner is required to file Form 8990. See the Instructions for Form 8990 for additional information.

For tax years beginning after 2017, the partner’s basis in its partnership interest at the end of the tax year is reduced (but not below zero) by the amount of excess business interest allocated to the partner for the tax year, even if the partner is not allowed a deduction for the allocated excess business interest in the year of the basis reduction. If the partner disposes of a partnership interest in which the basis has been reduced before all of the allocated excess business interest was used, the partner increases its basis immediately before the sale for the amount not yet deducted."

So, in the likely event that a PTP investor fails to use all of the EBIE amounts from a specific PTP prior to a complete disposition, those amounts are immediately released upon such a disposition - just like other accumulated PTP losses that were subject to limitations prior to the disposition. (I am setting aside the potential issue of a partial disposition, which would complicate this. TurboTax doesn't handle partial PTP dispositions well.)

What I really don't understand is why the IRS isn't clearer about how the items on Form 8990 relate to other tax forms - Form 1040 and its Schedule E in particular? I don't doubt that it is a small minority of taxpayers dealing with this, but a set of "helpful hints" guiding an average PTP investor through this would make compliance quite a bit easier.

Please comment if you see any problems with my understanding above. Thanks!

P.S.  I had the advantage here of having TurboTax Business, which allowed me to use the Form 8990 functionality there to hammer out the form.  Not ideal, as I had to create a "pseudo Form 1065" for myself to do it, but it seems to have worked - as long as I can correctly understand how Form 8990 relates to 1040 and its related schedules.

[tagteam]

Hopefully, you will receive some helpful input here, but the instructions are fairly clear in the sense that the PTP should provide you with sufficient information to complete your return.

If a pass-through entity is not required to file Form 8990 because it is a small business taxpayer, but a partner or shareholder is required to file Form 8990, the pass-through entity may be requested to provide certain information so that the partner or shareholder can complete their return. See Ownership of pass-through entities not subject to the section 163(j) limitation, later.

[wstewart]

Thanks @tagteam .  I agree, the PTP should provide guidance, although much of what they do provide often seems to be "cut and paste" from IRS documents.  And their K-1 preparers usually decline to offer much help over the phone (at their 800 number), for fear of giving out "tax advice" in some inappropriate way.

I think the real issue here is that the IRS appears to have an unspoken assumption that anyone dealing with this issue will have a professional accountant handling their taxes.  Which probably isn't a bad assumption, but it does leave out a good number of individual investors in PTPs, who do handle their own taxes.

[wstewart]

As a follow-up to my post above:

In the event that a PTP investor has EBIE (or a carryforward from prior years) but no excess taxable income or excess business interest income in the year of a complete disposition of that same PTP, how does the EBIE amount "exit" Form 8990 and move over to the PTP basis, for the relevant calculations on Form 1040 Schedules D and E?  Does one just manually insert the appropriate figure in Form 8990 Schedule A, line 44(h) to release the relevant amount (making it appear on Line 30 of Form 8990)?  Even when there is nothing (i.e., zero-dollar amounts) in the corresponding lines 44(f) and 44(g)?

[tagteam]

You would most likely have to use the worksheet contained in the instructions for your K-1.

See https://www.irs.gov/instructions/i1065sk1#idm140228279135040

[nexchap]

@wstewart Let me preface this with "not tax advice".  I've struggled with 8990 as well, so will offer my conclusions.  But again, not tax, legal, investing, or life advice.

Your understanding matches mine:  this is largely just a paperwork burden for small PTP investors who are pretty unlikely to have their tax bill actually affected.  The way you describe filling out the forms matches what I do.

As to how you "exit", and add any unused EBIE back to basis, I haven't read anything that lists requirements for documenting that.  So I just keep my own records.  When computing basis on the Supplemental Sales Schedule provided by the PTP, the unused EBIE carryforward gets added back into basis, and all gains/losses use that adjusted basis.  On 8990, Sched A, I just drop the PTP since there's no longer any carryforward to document.  If the IRS ever has a question, it'll be easy to provide the backup at that point.

Hope that helps.

[wstewart]

Thanks @nexchap .  All of your disclaimers are duly noted.  That said, it helps to someone who I consider knowledgable double-check my work.  I hope others may find this thread helpful.

[phraxos]

How does one deal with the problem that TurboTax (for individuals) does NOT support Form 8990?

[nexchap]

@phraxos You have to complete it manually outside TT (you can download the form through the IRS website).  I file by mail, so just add the form to everything TT does.  There may be a way to file your TT return electronically, and then mail 8990 in separately, but I haven't dug into that.

[wstewart]

@phraxos Yes, I would say that @nexchap is right, and that, if you need to file Form 8990, most taxpayers will be limited to filing their entire return by mail, and completing the 8990 outside of TurboTax.

I have the advantage of already purchasing TurboTax Business (to complete unrelated 1065s every year), and this version does include Form 8990, so I can use it to prepare the form, although it is a little tricky to do (since you basically have to create a dummy 1065 to access that single 8990 form).  So, that's to say, it can be done if you already have TurboTax Business ... but I wouldn't buy TurboTax Business only for that purpose.  Once you get the hang of it, completing the 8990 seems fairly routine.  Most PTP investors will only use a handful of lines on that admittedly complicated form.

[Rub9]

Can someone help? 
I have a K1 from an investment and has Excess business interest expense, so I have to file for 8990. Question is, do I need to report this as it is only $6 in that box. This is shares I bought and they pay dividends and have not bought or sold anything in the past year.

[RobertB4444]

You are entitled to not take an expense that you are qualified for and pay the extra taxes that become due because of it.

So leave it off if you want to

@Rub9 

[memphisjeff]

Ok, i find this all very confusing.  I am filing because I also have k-1 box 13K amount for my ET stock (never had this in my MLPs before).  I don't understand why you think you are exempt from 163?  Are you the taxpayer or is the MLP?  I understand they don't pay tax but is the form talking about them or us?  ET has income well in excess of 25M and would be subject to the limitations (which in fact they are, hence they are notifying us in the k-1).  But then we say we are exempt?  That sounds fishy.

Next, if you don't fill out section 1, how can you fill out the rest of the form?  There are items that seem to require numbers in Section 1.  Part 2 for Partnerships (line 32) starts with entering the info from line 31...from section 1. 

Next, what do we use for line 6 taxable income?  Again, is this my personal info, my income from box 1 of my k-1, or something else? 

Here's what I've come up with:  the box 13K amount goes in line 3.  Everything else is zeros.  I guess for line 6 i could enter Box 1 income (which is a loss and will end up as a zero). 

Any help would be appreciated.  Starting to look like i'm going to have to file an extension, which stinks.  Anybody have a screenshot with an example they could post?  Thank you!