Passive loss carryover due to small partnership expense

Forum|Forum|3 years ago
March 8, 2023
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I'm a limited partner in a partnership that rents out farmland we jointly own, and every year the firm that prepares our K-1 (1065) forms fills out Part III for each partner as follows: Box 1 (Ordinary business income/loss) = -7 [or some other small negative number close to that]; Box 2 (Net rental real estate income (loss)) = [the amount I receive for rental income]; and Box 19 (Distributions--code A) = [amount I get paid after property taxes and out-of-state withholding are deducted]. The accountant who does this for us has said that as individual filers we technically need to file TWO K-1 (1065)s since box 1 and box 2 refer to separate activities (though she supplies us with only ONE K-1 (1065)). However, box 1 represents solely each partner's "share of the fee paid to the Sec. of State of [name of state] for the annual report of the entity." I am fine going through the preparation (in TTax) of two separate K-1 (1065)s, but every year the program asks me about passive loss carryovers that it calculates from previous similar box 1 fees the past few years. Then it goes into a long line of questions and worksheets about passive activity losses that I do not understand. On the screen "Report Carryovers - Regular Tax", the only thing shown is box 1's ordinary income of -12. Next up is the "any other carryovers" screen, which I leave blank. The -12 reappears next on the Report AMT carryovers screen, and after that I leave the "report other AMT carryovers" blank. On the next screen, the -12 appears again as "QBI suspended loss passive," followed by a screen to enter info about passive losses. I have no code Z in box 20. I don't believe we have any activities classified as SSTBs. Is there any way to stop this perpetual carryover (based solely on paying a sec of state fee) or am I stuck with until divesting this asset? Second question: Am I overreporting income by putting the Box 19 amount (distributions) on both forms? Should I be putting that amount only on the form that represents actual rental income?

TurboTax Self Employed Online

maglib

Employee

@tseib

The key to determining if your farm qualifies for the Qualified Business Income Deduction (QBID) for SSTB is your farm being a "business". In other words, you farm to make a profit and not just as a hobby. If so, you may be entitled to the QBI deduction of up to 20 percent, subject to various limitations.

According to the IRS: "You are in the business of farming if you cultivate, operate, or manage a farm for profit, either as owner or tenant. A farm includes livestock, dairy, poultry, fish, fruit, and truck farms. It also includes plantations, ranches, ranges, and orchards and groves."

Onto the k-1 question. You are talking an immaterial value here and as your accountant did, he put it into 1 1065 therefore report it in 1 k-1 as other income. It is related to that business so I'm unsure why he claims otherwise.

You created a history of small passive loses which you could not use as they could only be used against passive income by doing this otherwise. You basically have a carryforward for any future passive income that you can use in perpetuity. Generally, you may deduct in full any previously disallowed passive activity loss in the year you dispose of your entire interest in the activity.

Passive just means you did not materially participate in the business.

Your last question, I'm a bit confused. What do you mean you are reporting it twice? It should be reported once during the k-1 interview.

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tseibAuthor

Thank you for your timely reply and thoughtful response, @maglib . To clarify, the other partners and I do not farm at all—not as a business, not as a hobby. We simply cash-rent the land (we inherited) to a real farmer and get a contractual yearly payment that is divided among the partners. So no QBID. In regard to the K-1(1065), the accountant who preps the forms wrote this in regard to the box 1 entry [my commentary in italics]: "-6 [amount varies slightly by year] is your share of the fee paid to the Sec. of State of [state name] for the annual report of the entity. The rent income is on its own separate form [<--not sure what she means by this, since I can clearly see the "rent income" right there on this exact same K-1(1065] and the cost of the annual report actually should be an entity expense, not a rent expense, although there is no tax detriment/audit risk to place it either place [<--Then why couldn't she just have "combined" them somehow so we don't have to do two K-1(1065)s?] but the fee is technically not a rent expense . . .This may seem cumbersome for self-prepared individual returns. Yes, you enter the partnership as if it is 2 partnerships and put the 2 different income/loss items on each." [so why didn't SHE create two different K-1(1065s) for each of us?] This advice [two separate K-1s when filing taxes] seems to fit what the TT interview is also suggesting:

So when entering the first K-1 in TT (from a single K-1 provided by the accountant, with values in Part III boxes 1, 2, and 19), I create one K-1 with ONLY my box 1 value (the small sec of state filing fee "loss") + the box 19 value (distributions), and ANOTHER K-1 with ONLY the box 2 value (the net rental income) + the box 19 value (the distributions) AGAIN. Perhaps I should be entering that box 19 value only once, on ONE form--the K-1 that reports box 2, since it somehow seems more "related" to the rental income? (Am I actually being taxed twice for entering box 19 on both the first and second form? I don't think so, as the "wages and income" summary page shows only ~one year's income value.) Actually, if there were any way to get around this whole loss carryover thing by somehow combining everything into one K-1, I would do it, because frankly claiming 6 or 7 bucks a year as a loss (even if I knew how to use that to my tax advantage!) is worthless to me in exchange for the yearly hassle and heartburn and time spent worrying about this whole damned "two separate K-1s and loss carryover" junk.

maglib

Employee

@tseib The reporting fee is passive as well as the rental income so combining it would be fine, they both should be reported on Schedule E which is rental. They both are passive income or losses.

Yes, you can leave the distribution blank on the other K-1 entry. In actuality, it won't affect your tax anyways.

You should also be entering any other expenses you may personally have within the schedule E such as mailings, stationary, maybe a portion of a computer, the portion of TT costs that required an upgrade to file, maybe visits to the farm or the accountant, etc.

You should read up on what each line item is and where it should flow to on your tax return. It is sometimes easier

https://www.irs.gov/pub/irs-pdf/i1065sk1.pdf