K-1 partnership disposition - liquidated in 2018, and loss handling

[Mikey12]

In 2018, the general partner of a partnership of which I am a limited partner liquidated the partnership, transferring the effectively worthless assets to a non-profit. My investment was $25,000. There were no distributions and thus my entire investment is worthless.

Not realizing there would be no further K-1s after 2018, I failed to indicate in my 2018 TurboTax filing that this was the last K-1. So now I am in the process of filing an amended 2018 return to correct this. My 2018 (final) K-1 Ending capital account basis is negative by a few thousand dollars, indicating a loss.

I am having trouble figuring out how to enter this in Turbotax 2018. What I have done thus far with the amended 2018 return is:

1. Describe the Partnership: Checked the box for "This partnership ended in 2018."
2. Describe Partnership Disposal: Selected "Complete disposition"
3. Tell Us About Your Sale: Selected "Sold Partnership Interest" // not sure this is correct...?
4. Enter Sales Dates: Purchase Date: was in 2013, Sales Date: 12/31/2018
5. Enter Sale Information:
   • Sale Price = 0.
   • Selling Expense = 0.
   • Partnership Basis = 25000.
   • Ordinary Gain and 1250 Gain left blank
6. Next screen is Review Investment Gain or Loss on Sale, and it indicates zero Short-term (and AMT) gain and -$25000 Regular (and AMT) long-term gain.
7. Choose Type of Activity: Select Business - Box 1
8. Did I materially participate?: Select No
9. Is this an Oil or Gas Property?: No
10. Entered Box 1 Info: populated wi the relatively small loss, negative value
11. Check one box 14 with amount = $0 per the K-1.
12. Describe the Partnership: Checked "I have passive activity losses carried over from last year" and "All of my investment in this activity is at risk."
13. Report Carryovers - Regular Tax: Box 1 - Ordinary Income pre-populated with amount from 2017, a negative value -$29k and change.
14. Any other Carryovers?:  These entries are all blank.  SHOULD I ENTER ANYTHING HERE?
15. Report AMT Carryovers - same as Regular Tax and carryovers
16. Done

My prior year (2017) return generated Form 8582 - Passive Activity Losses - of around $29k and change; 2017 Form 8582 Part I, Line 3c "Prior years' unallowed losses from Worksheet 3, column (c), due solely to this partnership.

Here's my problem/concern: I requested guidance from a professional accountant familiar with the LLC who replicated my situation with a pro-forma new client on his professional tax software and his result is:

The disposition of the LLC interest triggers the release of a $29k unallowed passive activity losses, subject to my $25,000 basis limitation. The expected result the software produces is a “Nonpassive loss allowed” in the amount of $25,000 on Schedule E, second page, Part II, in Box 28(i).

That, in turn, flows to Schedule 1 following immediately after and part of Form 1040, on Line 5.

And that, in turn, flows to the first page of Form 1040, Line 7a, Other Income from Schedule 1.

However, the result I am getting with my TurboTax 2018 is different:
Schedule E, Part II "Income or Loss from Partnerships and S Corporations" shows the following:
Line 27: Are you reporting any loss not allowed in a prior year due to the at-risk...": YES
Line 28: In addition to the LLC in line A, with the small loss (item 9 above) entered in column (i) Nonpassive Income and Loss, it introduces a new item with Name = "PYA" (same EIN as the LLC) with the $29k entry in column (g) Passive Income Income and Loss. I understand "PYA" to mean prior year adjustment, referring to prior year unallowed losses that are now deductible, per https://ttlc.intuit.com/community/business-taxes/discussion/what-does-pya-stand-for-on-sch-e/00/5905...
Lines 31, 32 show the totaled value of the columns (g) and (i), which amounts to a $29k+ value.

My turbotax results in $29k+ flowing to schedule 1. This is different than the professional accountant's results which resulted in a $25,000  basis limited value flowing to schedule 1. How do I deal with this in Turbotax to result in a $25,000 loss flowing to schedule 1 ?  It suspect the professional accounts results are correct, which means my Turbotax entries are incorrect. Can someone point me in the right direction?

Thanks!

[Anonymous]

your problem with TT is your basis should be zero.  your original investment of $25,000 is reduced each year by net losses regardless of whether they are taken or not and distributions. thus losses suspended by the PAL rules reduce basis.  based on what you posted at the end you should have been allowed $25,000 in passive losses and $0 basis. cumulative losses allowed can't exceed your original investment plus any items of income less any distributions.  

the pro's calculation appears to be correct. net nonpassive (when you dispose of a passive activity the passive loss carryover gets deducted as a nonpassive loss) loss of $25,000. you get no capital loss. 

what you did would result in $50,000 of losses $25,000 on schedule E and $25,000 on schedule D

first it would flow to form 8949 part II type F. from there it flows to schedule D part II line 10

net capital losses would be limited to $3,000

[Mikey12]

@Anonymous.    Thanks for your reply.  Based on your reply, I updated the Partnership basis to 0 and Ordinary Gain to 0, but that did not change the Schedule E Part II entries.  PYA is still there as mentioned earlier  - in column (g) as $29k+ Loss in the Passive Income and Loss column and lines 31, 32 continue to show the -$29k totaled amount.    Perhaps entries in the Describe the Partnership and Report Carryovers screens (in my original post for items 12. and 13. need adjusting?  

As mentioned earlier,

Describe the Partnership:

• the "I have passive activity losses carried over from last year." is checked
• the "All of my investment in this activity is at risk" is checked
• the "I have at-risk losses carrying over from 2017." is not checked

Report carryovers:

• Box 1- Ordinary Income is -29k.  This was pre-populated.  All the other entries are blank.

Any Other Carryovers?

"Shown below are some additional passive loss carryovers for 'LLC' which transferred from your 2017 return.  These are losses that were disallowed in 2017 under the passive activity loss limitation."

• all nine items are blank, but perhaps some of these need to be manually entered???  For example:
  • Ordinary Gain/Loss - Sale of Assets
  • Ordinary Gain/Loss - Sale of Partnership Interest

I look forward to further guidance.

Thanks!

[Anonymous]

the form 6198 which is supposed to limit losses to amount at risk, essentially your basis, does not work since it was not used from the first year of the partnership.  therefore you'll have to make certain adjustments so your allowed loss for 2019 (I assume there was none allowed in prior years) is $25,000,  enter the 2019 losses on line 1 or 2 whichever is applicable.  under section k on the k-1 check the box that indicates some investment is not at risk. use the quick zoom link for form 6198 (first one).  in Part II line 6 enter $25000 reduced by cumulative prior year losses not to exceed $25,000. so if cumulative prior year losses were $23,000 line 6 would be $2,000.

further down on the K-1 worksheet in section A - passive activity adjustment - change the amount if needed to  the lesser of cumulative prior year losses or $25,000

in section B use the same amount. 

if done correctly column c in section A and B should be $25,000 

[Mikey12]

@Anonymous

• I did exactly per your recommendations (reminder - this is 2018, not 2019 TurboTax).
  On K-1 Part II section K, check the "Some investment in partnership is NOT at risk" box
• then QuickZoom'ed to Form 6198 "At-Risk Limitations" (first QuickZoom box)
• On Form 6198:
  • Part II line 6 entered 0. (prior year losses already exceeded 25000.). This in turn resulted in zeroing out following lines. So the Line 20 amount at risk and Deductible loss Line 21 are both 0.Allowed Loss totals 0, and Amount at risk as of end of year Line 21a is also 0. The Disallowed Losses Smart Worksheet shows the small current year loss amount as Lines 1, and 5.
• Returning to the K-1:
  • Section A "Passive Activity Adjustment to Income or Loss - For Regular Tax Purposes"
    - Box1 Ordinary income (loss) for Schedule E: line 1a "Ordinary income (loss) pass through", column (b) Suspended Loss Carryover From Prior Year" I entered the -25000.   
  • This automatically triggered -25000 in column (c) Net income (Loss) Allowed as well. It then followed down to the Line 9 Totals for both columns (b) and (c) as -25000.
  • I did the same for the Section B AMT equivalent.
• Schedule E: Then the K-1 changes apparently automatically populated Section C "Income and Loss Reported on Schedule E, Supplemental income or Loss" with the following:
  • Entry 1: with LLC name: 0 amount in column (h) Nonpassive Income and Loss column (h)
  • Entry 2: with PYA name: 25000 in Passive Income and Loss column (f)
• Are these the expected columns to which these amounts should report?

- BTW, in the K-1, I noticed that Part II section L "Partner's Capital Account Analysis" Beginning Capital Account and Ending Capital Account values both show the same value: $6k and change, and the accompanying "Tax Basis" box is checked. Is this of concern, and should I handle this or ignore it?

• Returning to Schedule E, Part II:
  • Line 27 the Yes box is checked "are you reporting any low not allowed in a prior year due to the at-risk, basis limitations, a prior year unalloyed loss from a passive activity..., etc."
  • Lines 28 entries, both the LLC and the PYA (same EIN as LLC) lines have the (f) "Any amt is not at risk" box checked.
  • Then in the following Passive and Nonpassive Income and Loss columns:
    • the LLC line shows 0 in the Non passive Income and Loss column (i)
    • the PYA line shows 25000 in the Passive Income and Loss column (g)
    • Then this all totals down to lines 31 and 32 "Total partnership and S corporation income or (loss)" = -25000.
    • This in turn combines to produce a Total income or (loss) value in line 41.
• Then this Schedule E Line 41 value shows up on Schedule 1 Additional Income Line 17 "Rental real estate, royalties, partnerships, etc." This, I believe is the expected outcome. Any comments?

Once this is settled, I move on the amended State (CA) tax form...

[Anonymous · Accepted solution]

it is difficult to give exact answers because I can not see any of the K-1's for this entity that I'll call A

so here are the assumptions I'm using 

1) A is not a publically traded partnership, if it is #2 doesn't apply

2) in prior years you had no passive income from other entities.  if so their PAI would have reduced A's PAL carryover.  you would see this on form 8582 and related worksheets.  and TT would have carryforward for A the reduced amount 

3) you invested $25,000 

4) over the years A reported PAL's totaling $25,000 or more

5) over the years you received no distributions

6) over the years A reported no portfolio or other income or losses not subject to the PAL rules. 

7) I have no idea why schedule L reporting on a tax basis has a positive amount for both beginning and ending capital.  I would think that if there had been net cumulative losses of $25,000 or more the ending balance would be zero or negative.  You can review prior K-1's but if not apparent only the partnership's GP or tax preparers could answer. This may or may not affect your return.  

summation: 

assuming a) item 7 has no effect

b) you had no other schedule E reporting 

c) my other assumptions are correct

then line 29b, 31,32 and 41 of schedule E would show $25,000 in losses that gets carried to schedule 1 line 17 and the net of schedule 1 gets carried to 1040 line 6

[Mikey12]

@Anonymous

Thank you for your excellent clarifications and assumptions.  

I accordingly updated my Federal return and the refund amount favorably increased.

Moving on to the 2018 California State return for its amendment adjustments:

Working on the corresponding K-1 form for California:

• Partnership K-1 Adjustments" page - various - no adjustments; click Continue
• Partnership K-1 Adjustments - Aggregate Gross Receipts: 0.; click Continue
• Disposition of Partnership Interest - Adjustments: $0 all, same as Federal; click Continue
• Passive Loss Carryovers - at this point, click on "Forms" which opens Form 565 Schedule K-1 Worksheet - Partnerships
  • Form 565 Page 1:
    - "Some investment NOT at risk" box is checked
    - "Final K-1" box is checked
    -  Line 1 "Ordinary income (loss) is pre-populated with amount from Federal K-1 schedule
  • Form 565 Page 3 "Adjustments to Profit or Loss - Passive Activities":
    • Passive status shows "Disposition"
    • Regular Tax Line 1a Ordinary income (loss) pass through column (b): I entered the same Suspended Loss Carryover (negative amount) From 2017 Federal. That automatically carries to column (c) Net Income (Loss) Allowed and also to Line 9 Total.
  • Form 565 Page 4 AMT I entered the same for Line 1 as on Page 3. It likewise carries to AMT Line 9 Total
  • Form 565 Page 5 Federal Income/Loss and Passive Information:
    • Line A "Partnership income reported on federal Schedule E", Federal net income (loss) allowed column is pre-populated with the above suspended loss Carryover negative amount.
    • Line E "If this activity is a passive activity: Enter the current year net income or the current year net loss recorded on the federal Passive Activities Worksheet 1 (Or Passive Activities Worksheet 2, column A or B, whichever is applicable": I entered the amount from Federal Form Line 8582 Line 1a. This amount is positive and is due to a separate passive activity.

• QuickZoom to K-1 Partner At-risk Limitations Allocation Worksheet:
  • In the Carryover Prior Year Loss column for Form 6198 Part A Line 1 Ordinary income or loss, I entered the same Carried over loss (negative value) as on Federal form.  This results in a negative amount in the "Disallowed Loss" column, but '0.' in the "Allowed Income or Loss" column for Part A Line 1 total.
  • These same amounts carry to Page 2 of this worksheet Part F Lines G and H "Total reported on Sched E"
• Enter At-Risk Information (Form 6198): pre-populated with current year loss (negative value). In the Disallowed Losses Summary at the bottom this negative amount is 100% disallowed;

At this point, exit/toggle out of Forms and observe the CA Refund amount increased favorably.

Might I have missed anything?