Question

Final K-1 conversion to C Corp, recognize passive losses?

Forum|Forum|6 years ago
February 20, 2020
3 replies
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I am a limited partner in a business that converted to a C Corp on 12/31/2019. I have passive losses (including passive carry-over losses from prior years) for a small amount which is well under my basis. As the partnership ended my understanding is that I should be able to recognize the passive losses in 2019. All of my investment was at-risk.

In turbo-tax online, I am trying to figure out what to select to accomplish this. When I select partnership ended in the K-1 entry section, and "disposition not via sale", turbo-tax suspends the loss and tries to carry-over to 2020. I think this is incorrect as with the partnership being over, the passive loss should be recognizable.

If I choose complete disposition, turbo-tax asks for a sale amount for my partnership units. I did not receive any proceeds from the conversion, but did get ownership in the new C corp (specifics not disclosed by the new C corp). I am leaning towards choosing complete disposition and entering the same amount for basis and sale amount for the partnership units, creating a net zero gain/loss, and this does allow the passive losses to be recognized in the program for 2019. However, I am not sure how the partnership (now C corp) handled and reported the proceeds from converting my partnership units to the IRS.

Any idea on the best way to handle this in turbo-tax, and am I correct that I should be able to recognize the total passive losses (with carry-over) since the partnership is now a disregarded entity.

TurboTax Premier Online

Carl11_2

Employee

I am assuming IRS Form 8832 was filed for a Partnership or Multi-Member LLC to be "treated like a C-Corp" for tax purposes only. Let me reiterate that. *FOR* *TAX* *PURPOSES* *ONLY*. This is important to understand!

So what you do "on paper" with the 1065 and 1120 are not "conversions" per-se.

I should be able to recognize the passive losses in 2019.

No. Nothing was sold in 2019.

You should have two K-1's. First, you should have a "final" k-1 from the 1065 partnership, and your first K-1 from the 1120 C-Corp. The "final" box should be checked on the 1065 K-1. Then I would expect that 1065 K-1 to show a distribution of assets and capital to you.

Next, the 1120 K-1 should show a capital contribution from you, of the capital and assets that were distributed to you on the 1065 K-1.

Therefore, nothing was sold. So there's no recapture of depreciation (if applicable) and no realization of any losses. All losses, depreciation, assets and capital is transferred from the Partnership to the C-Corp, and you're just a "pass through entity" for that transfer since you have a stake in both the old partnership and the new C-Corp.

A

Anonymous_

Employee

@Carl11_2 wrote:
You should have two K-1's. First, you should have a "final" k-1 from the 1065 partnership, and your first K-1 from the 1120 C-Corp.

C corporations do NOT issue K-1s.

A

Anonymous_

Employee

@dsross wrote:
I am not sure how the partnership (now C corp) handled and reported the proceeds from converting my partnership units to the IRS.

I would suggest contacting the partnership representative (or corporate liaison) and inquiring. Regardless, it appears as if the partnership has terminated after the conversion.

D

danielb2

https://www.thetaxadviser.com/issues/2017/apr/disposing-passive-activities.html

Suspended passive losses cannot be deducted when the passive activity is exchanged in a nonrecognition (i.e., tax-deferred) transaction, such as an exchange under Sec. 351 (transfers to a controlled corporation), Sec. 721 (contributions of property to a partnership), or Sec. 1031 (nontaxable exchanges), if no gain is recognized. However, the taxpayer recognizes any gain as passive activity income, against which passive losses can be deducted (Tax Reform Act of 1986, S. Rep't No. 99-313, 99th Cong., 2d Sess. 726-27 (1985)).