Interest expense for an partnership with passive activity income

[TaxCat1]

Does interest expense for a partnership -- with passive activity (non participation) income -- go on Line 15 on page 1 of 1065?  

This partnership receives K-1 ordinary income (Box 1) that goes on its 1065, Line 4 (other partnership income).

This partnership only has passive activity (non participation) income.

Seems like 13b does not apply since that's for investment interest which apparently is something different, according to instructions to 1065 form.

[ThomasM125]

You are allowed to deduct interest on debt that is "incurred in the trade or business activities of the partnership." If the debt does qualify for a deduction, then it would be entered on line 15 if it was not entered elsewhere on the partnership tax return. So, you need to determine first if the debt is allowable based on it being an ordinary and necessary expense of the partnership, and then determine if it would be better entered elsehere. Here is a list of interest that should be entered elsewhere on the tax return, and suggestions on where it should be entered, from the instructions for Form 1065:

[TaxCat1]

@ThomasM125 Thanks. so does my description fit this definition?   debt that is "incurred in the trade or business activities of the partnership." 

[MaryK4]

Yes,  debt that is "incurred in the trade or business activities of the partnership." is very specific and does not apply in the situation you describe.  @TaxCat1 

[TaxCat1]

is an investment partnership a trade or business for purposes of page 1 of form 1065?

[TaxCat1]

in that case, where is interest expense for passive activity (non participation) entered?

[PatriciaV]

Please clarify the source of the interest expense and the purpose of the partnership.

[TaxCat1]

@PatriciaV 

It's an investment partnership that receives K-1 passive income (non participation) from another partnership.

The investment partnership has the interest expense to fund those investments.

[PatriciaV]

Yes, this is investment interest expense, since the interest is allocable to debt used for investment purposes and those investments produce income. Report this on Line 13b. 

See IRS Instructions for Form 1065 Schedule K Line 13b. Investment Interest Expense (Code H).

[TaxCat1]

@PatriciaV 

But this investment interest is for a passive activity and instructions to  Instructions for Form 1065 Schedule K Line 13b. Investment Interest Expense (Code H) say:

"Investment interest expense doesn't include interest expense allocable to a passive activity"

[PatriciaV]

ThomasM125 stated in the original answer that the interest expense should be entered on Line 15 if it is incurred while engaging in the business of the partnership. Is your partnership in the business of investing in other entities? If so, report the interest expense on Line 15.

Investment is generally a passive activity unless you are a stockbroker or an active trader. Interest expense for those businesses is reported on Line 15. But if you borrow money to buy an investment that produces income, the interest expense is reported on Line 13b.