Schedule 8960 4b

[lucyx513]

I have a K-1 from a S corp that is engaged in the business of trading financial instruments or commodities. The K-1 indicate -5,000 in ordinary business income which is various expenses including interest expense to support trading. It reports 10,000 in net short-term capital gains. 

When it comes to schedule 8960. It is pulling in the 10,000 in short-term capital gains. On line 4a it pulls in -5000 of ordinary business income but it is automatically backed out in 4b. Shouldn't I be able to net down the trading losses for NIIT purposes by the investment expense? 

Is there some way I can manually edit the form in TT online? 

If not, what do I need to change in the input of the K-1 to make it not automatically backed out? 

[PatriciaV]

The short answer is, "No," you generally can't use capital gains to offset ordinary losses from Schedule K-1 when calculating NIIT on Form 8960.

The reversal on Line 4b is typically due to the Passive Activity rules. If you didn't materially participate, the activity is considered passive. If the loss wasn't from a passive activity, the loss would be excluded from NIIT entirely.

The IRS rules are that capital losses can offset capital gains in the NIIT calculations. And ordinary losses cannot offset capital gains.

Note on "Material Participation": If you materially participate in the S-Corp, the $5,000 ordinary loss is excluded from NIIT because it’s "active" income. Conversely, the $10,000 capital gain (Box 7) is usually considered investment income regardless of participation, unless that gain was generated by the sale of operational assets used in an active trade or business (which would require a Section 1411 adjustment on Line 5c).