How to flow the ordinary business loss on the K-1 from an MLP to Form 8995 Line 6

[brettbrinkman]

I am using TT Personal 2021 to match the TT return the one my accountant did last year. My goal is to complete the 2022 return myself. My only open issue is I have stock of Magellan Midstream Partners, an MLP that provides a K-1 each year. His Tax Return Carryovers to 2022 show the -865 as a Passive Activity Loss, but I have difficulty getting this result in TT. On the K-1 form in TT 2021 I enter the annual loss of -865 onto the QBI Section D2 of the form. I enter the loss on Line E-3 but Line 4a shows a 0 calculated result.  If I add the -865 to 4b then the -865 flows to Form 8995 Line 6. This calculates my Tax Return Carryovers to 2022 correctly but I don't feel it's the correct approach.

The 2021 return from my accountant (a CPA I have used for 15 years) has the -865 on form 8995. He did not use form 6198 and his summary chart shows the -865 as a 2021 Disallowed Loss and no current or Prior Year At-Risk or Passive Disallowed Losses.

I should mention I have checked the Box "All Investment in Partnership is At-Risk". Frankly, I reviewed many threads in the Forum and its still not clear if that's accurate or not. However, when I try checking the "Some Investment is NOT at Risk" it forces the use of Form 6198 and changes other calculations that overall appears a much worse approach.

Thanks in advance for your help,

Brett

[Anonymous_]

@nexchap 

[Mike9241]

each MLP stands on its own. unless you dispose of it in a fully taxable transaction, none of the business losses are deductible (portfolio income/loss/expenses are taxable or deductible based on what they are) and since the loss is not deductible nothing flows to the 8995. you have a QBI loss carryover.

likely your tax basis is the ending amount in section L. unless it's negative there should be no problems.  have you been tracking tax basis since acquisition?  Turbotax doesn't do it and since this is treated as a partnership, your basis is what you paid +/- net income/loss for all years - distributions for all years which should be the same as section L 

don't know which version you are using but you should have come across questions about loss and qbi carryovers when entering the k-1. Maybe someone else will provide guidance or contact support. 

[brettbrinkman]

thank you for the feedback. I think you're on to something regarding the Basis. Currently, Section L is blank. Where do I enter the initial basis for the MLP? I don't have a spreadsheet yet, but this is only my 2nd year with the stock so I can easily create it.

Form 8995 on my original tax return does show the -865 loss on Line 6 as PTP income but then a zero on Line 8 as no qualified REIT or PTP income.

I am using 2021 TT Premium Desktop.

[nexchap]

@brettbrinkman  A couple questions / comments:

• Do you have your own copy of the MMP K-1 for 2021?  I ask, because you mention section L as being blank.  It won't be blank on the K-1 itself, and you're going to want that for future years just as reference.
• Are you following the TT interview, or trying to do this in Forms mode?  I ask because you're referring to entering values directly into the QBI worksheets, and there's no need for this is you follow the interview.
• TT won't track your basis.  You'll need to do this yourself, using the K-1s.  There won't be any tax issues associated with this, unless it goes below 0.  At that point, 6198 comes into play and things get more complicated.  Unless you want to develop real expertise in partnership taxes, best bet is to not let the basis get below 0.
• If you simply follow the interview, the correct info will flow to the forms for filing.  You'll also see a K-1 worksheet in your file that tracks the -865 carryover, and it'll show up in your 2022 return when you use TT to import 2021.
• As long as you used your own money to buy the MLP (i.e., you didn't take out a loan to do it), AND your basis is above 0, then you'd keep checking the "Investment at Risk" box in the interview.  That avoids TT creating form 6198.  Once either of those is not true, you'd stop checking that box and 6198 is brought into the discussion.

Hope that helps!

[brettbrinkman]

Thank you for the continued help.

SECTION L

- Yes, I have the K-1. Sorry, but when you said Section L I thought you meant Section "L" on the TT K-1 form under D2 - QBI deductions. I do have the K-1 Section L completed in TT.

One of my fundamental problems is whether this MLP has Qualified Business Income. Sometimes it appears the answer is yes and sometimes no. My accountant does not seem to show it, but on Form 8995 he has a Statement "FORM 8995 QUALIFIED REIT DIVIDENDS AND PTP INCOME, MMP PTP INCOME -365" and places this value on 8995 LINE 6. 

INTERVIEW PROCESS

- I believe I started with the Interview process, but I have made changes using the Forms process. What I'd like to do is walk through the Interview questions with you below and have you provide a response. I will put my current answers in parenthesis.

- Type of Partner (limited)

- Type of Partner (domestic)

- Percentage of share (entered from 2021 K-1)

- Liability share (from K-1)

- Capital Account (from K-1)

- Describe partnership (PTP box only)

- Type of activity (Business box 1)

- Materially participate (no)

- Oil and Gas property that does NOT limit my liability (no, they do limit my liability)

- Box 1 (-865)

- Boxes checked (I check all boxes used in K-1)

- Describe partnership (I have passive activity losses, All my investment AT-RISK)

- Report carryovers (Box 1 = -813, loss from 2020)

- Other carryovers (none)

- AMT carryovers (Box 1 = -813, loss from 2020)

- Other AMT Carryovers (none)

- QBI Carryovers (this is where I'm stuck. My accountant shows no QBI Carry overs, but he does show the -813 as a passive activity loss carryover)

- Code Z in Box 20 (No Code Z on K-1, but next page has a Supplemental Code 20Z "Section 199A Publicly Traded Partnership (PTP) Income" of -865)

That's it!! I hope you can clarify things for me.

Brett

[nexchap]

@brettbrinkman The MLP is reporting stuff that would be QBI when/if its actually a positive number.  But right now they're just reporting losses.  Those losses don't affect your taxes, so form 8995 shouldn't be showing anything beyond the loss and a 0 tax deduction.  The losses they're reporting will be carried over to future years.  At some point, say when you sell, the K-1 will actually report a positive income.  It will be offset by the years of losses.  If the net is positive, it might turn into a deduction.

Your answers on the interview look fine, but for line 20 there's a code for that 199A income (maybe Z).  When you enter that into the interview, it will cause TT to ask all the QBI questions, and allow you to get the right values into the interview without going into forms.

[brettbrinkman]

Based on your response, I deleted the MMP K-1 info in TT and again worked through the Interview Process. As you suggested, I added the K-1 Line 20Z and it walked me through the QBI questions. Most of the results match my Acct's return. However, my discrepancy with the Accountants 2021 return is Form 8995 Line 6 "Qualified REIT dividends and publicly traded partnership (PTP) income or (loss)". My Acct return shows the value -865 on that Line, but the TT return is blank. As I walk back in TT why I have blank result, that same blank result appears on Form 8995 "Qualified Business Income Deduction Simplified Computation"  Line 6. So again, blank for me and -865 for Acct. Ultimately, TT then takes me to K-1 worksheet Section H5, PTP Income which is blank.?

I understand that it really does not matter because its a loss, and even on my Acct return Form 8995 LINE 8 you end up at zero because its a loss (negative number). I just don't understand why TT does not provide the same result.

I will track the losses in Excel anyway. Any suggestions or should I just give it up?

[nexchap]

@brettbrinkman When you went into the QBI interview questions, one of the first ones was asking for more information about the source of the 20Z number.  There should have been an entry for "Ordinary Income" (or maybe "Business Income"?)  You need to enter the -635 there.  It should then flow through to all the right spots.

If you did that, try posting some screenshots of the numbers you entered into the QBI interview and I'll see if I can pinpoint the problem.

[brettbrinkman]

Yes, I did enter the -865 into the Box 20Z questions. As you suggested I have attached all the screenshots from the 20Z question until the end of the Interview. Actually, the first several questions are Report Carryover questions which did not include images.

For some reason they did not upload in the proper order, but I'm sure you can figure that out.

[brettbrinkman]

On my Community page, several of the pictures are not showing. Here they are again.

[nexchap]

@brettbrinkman Your answer on the carryover question should just be what you had from 2020, not the 2021 number.  Other than that, your answers look right.  I'm not sure why you're not seeing those values come through into 8995, unless its a bug or TT is just deciding not to bother since there's no actual income.  Since you're now able to figure out the MLP process in TT, I'd suggest waiting until 2022 to spend more time on it.  You'll just want to make sure that the carryover info is correct (reflecting both 2020 and 2021) when you do the entry.

[brettbrinkman]

Yeah, that carryover entry was a typo, but thanks for pointing it out. I agree, I have already spent too much time on that issue. But, I was hoping to have a perfect match too feel confident going into the 2022 tax season. 

I am a lot smarter about the tax laws and feel I can work though it.  I have partial ownership in several apartment buildings and an installment sale from my business that I expected would be harder to resolve with my previous returns. The rentals have unallowed passive activity losses, depreciation, etc. But, I think I'll be fine, perhaps until I sell them.

Regardless, thanks so much for your timely and helpful feedback.

Brett

[brettbrinkman]

Of course I have been unable to let this issue go, and thought I would try again. After further effort, I can get TT to fill in Form 8995 correctly but then the 2022 Carryover is incorrect. So, I played with some numbers removed everything from the MMP K-1 except the 2021 Box 1 Income (loss) of -865, and here is what I found:

If the value of K-1, Part III Line 1 is zero or positive, then the QBI of Section D1, E1 income (loss) of -865 works. That is, Line 3a is -865 and Line 4a and 4c are -865. This flows all the way to Line H5 PTP income of -865. This also flows to Form 8995, Line 6 as -865. The issue with the process is the 2022 Carryover no longer includes the -865 current year loss.

However, If K-1, Part III Line 1 is any negative number (in my case -865), then QBI income (loss) of Section D1, E1 of -865 does not work. That is, Line 3 is -865 but Line 4a and 4c is 0. This flows to Line H5 PTP income of value of zero. This also flows to Form 8995, Line 6 as zero. Here the 2022 Carryover does include the -865.

It seems that Section D1, E 4a “Calculated QBI allowed after At-Risk/Passive Limits” will not allow a negative QBI value if K-1, Part III Line 1 is negative. I do not see that my At-Risk/Passive Limits should be causing the QBI income (loss) value of -865 to be limited back to zero.

Does this analysis provide any insight to the problem? It would seem a TT bug (unlikely) or I am missing something.

[nexchap]

@brettbrinkman Since form 8995, line 6, is the sum of QBI income/loss from many different sources, TT only transfers "allowable" QBI gain/loss to the form.  For example, if you had a second PTP, which actually earned a profit and reported $1000 in QBI, you'd want line 6 and 8 of form 4995 to show $1000.  It should NOT show $135, which is what would happen if you netted the $1000 with the -865 from MMP.  So line 6 only gets 'allowable' QBI income.

If you look at the help for this form (right click on line E10 'Allowable QBI from this business' and choose 'About QBI...') you'll see this quote: "If there are no losses for this business subject to at-risk or passive loss limits, then line E3 will transfer to line E4. Otherwise, line E4 will be limited to the portion of loss allowed under Treasury Regulations 1.199A."

When the PTP reports a loss on line 1, its losses are subject to passive loss limits.  So its losses aren't 'allowable' for QBI and don't transfer to 8995.  When you change line 1 to a positive number, you eliminate that restriction and make the loss 'allowable', so it flows to 8995.  So the program is working correctly.

I'm not sure why your accountant put the -865 on line 6, other than it made no difference to your return and may have just been convenient.  If they actually think that -865 is 'allowable', and would have netted it against (for example) the $1000 introduced above, you'd have to talk to them about their interpretation of the code.