closing a partnership tax implications

Forum|Forum|3 years ago
February 22, 2023
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We closed a business partnership at the end of 2022. Some years prior we had sold the business, and more recently the plant and property. In 2021 and 2022 we had losses from expenses with no income. I expected to use carryover losses from 2021 against my 2022 income (Forms 4797, 8582, School E). Turbo Tax presents me with two options under "Describe Partnership Disposal": Complete disposition or Disposition was not via a sale.

"Complete disposition" option brings the previous carryover losses into the 1040/Sch 1. "Disposition was not via a sale option" does not include the carryover losses in the 2022 1040. In my brief research, I read that when a partnership terminates, the partner loses the suspended losses. Does this mean I have to choose the "not via a sale option"?

Best answer by DianeW777

No. These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period." Until the section 1231 loss is applied against a net section 1231 gain, it is a "non-recaptured section 1231 loss" that is tracked for five years. You must monitor the loss each year.

DianeW777

A suspended loss can only be deducted if basis is increased in later tax years. So if the owners dispose of their entire interest, then basis cannot be increased, so the suspended losses can never be used to offset future income. The loss becomes permanent and unusable on the tax return.

This is part of the 'At-Risk' rules.