Take note that it is not automatic that a loss from 1065 Schedule K-1 gets deducted. More often than not, losses made out of passive activities that are more than the income from passive activities are disqualified for the present year. Passive losses may only be utilized to nullify passive income. A loss made out of a passive income not included in the income section of the return can’t be subtracted from the total income calculation. Such a loss will be moved forward until such time that it can be used to offset passive income. The loss carryforward is calculated by Form 8582.
Various activities may lead to passive income. These include rental real estate, limited liability companies, equipment leasing, limited partnerships and sole proprietorships which exclude the taxpayer’s material participation.
- Is a passive loss included in the Schedule K-1 Menu?
To know whether the passive loss has been included in the Schedule K-1 Menu, go to the Tax Return Summary page of the return then:
- Select Federal Section
- Then go to Income
- Proceed to Less Common Income
- Select K-1 Earnings
- Then select Schedule K-1 Form 1065 > choose K-1 from the listed entries
- Proceed to Entity Information
- In the event that the K-1 is labelled to be of a Passive Entity, there must be a passive income entered somewhere in the return otherwise it would not be deducted in the current year.
- By going to the View Results Menu, you will see Form 8582. From the form, you will see the calculation of unallowed and allowed losses on Worksheet 5 and 6 respectively.
Is the Partnership a PTP (Publicly Traded Partnership)?
Losses are accepted to the degree of the income when there exists an overall loss and the taxpayer fails to rid of their complete interest in the PTP to a different and unrelated person through a fully taxable transaction within the year. The remaining loss is forwarded for use in the subsequent year when the taxpayer is capable of offsetting it with their income.
To ensure that a return is labelled as a PTP:
- Go to the Tax Return Summary page of the return
- Proceed to the Federal Section
- Select Income
- Then go to Less Common Income
- Choose K-1 Earnings
- Continue to Schedule K-1 Form 1065 > Pick K-1 from the listed entries.
- Then select Entity Information
- In case the partnership is marked as PTP then the box next to K-1 is from Publicly Traded Partnership will be checked. The taxpayer can have their losses dedcted only if they have income to offset it or when they rid of their interest in the PTP.
Additional Information:
IRS Instructions for Schedule E (Form 1040)
IRS Instructions for Form 8582 - Passive Activity Loss Limitations