What am I doing wrong? K-1 1065 input

[Pacun]

Shark bought 10% of a business for $50K in 2020. Partner invested only the money and has never visited or worked at the business. K-1 show a loss of 2K.

I input the information of his $100K W2 and of his K1 loss. I entered -2,000 on line 1 Ordinary income (loss). I have also checked "passive activity" and "General Partner". I have also entered his basis as 0 at the beginning of the year and $50K cash contributions.  The 2K should be allowed as a loss, but it never shows on 1040. It shows on other forms but it never transfers to 1040. What am I doing wrong?

It is my understanding that passive losses up to 3K are deductible or were deduction prior to new law.

[ILLMAS]

See form 8582, the loss is probably suspended.

[Pacun]

I shows the loss on 8582 and the it also shows it as "unallowed loss". Sch E has a check mark on "check if some not at risk". I don't where that check mark comes from but if I override it, it doesn't change anything. 

All his money is at risk. He should be able to deduct 3K every year until his basis is gone, correct?

 

[jklcpa]

First, he has to have basis and have at-risk, which you say he has. I have no idea how to remove that check mark in ATX, so someone else will have to answer that.

What type of business is it? Is it trade or business loss, or does it have something to do with rental real estate?

His lack of participation or no other passive income is why the loss isn't currently deductible.  PALs can only offset other passive income.  If he doesn't have passive income and this is rental real estate, then the only way the loss would be  allowed is if he has active participation, or material participation as a real estate professional) in this activity and under $100K of modified AGI, and that is phased out once the MAGI reaches $150K.

 

[Abby Normal]

4 hours ago, Pacun said:

He should be able to deduct 3K every year until his basis is gone, correct?

Is this partnership not planning on being profitable? Are the losses due to lots of 100% bonus depreciation?

He can only deduct passive losses against passive income. So he has to wait until the partnership has a profitable year or until he sells his share.

[Pacun]

Thank you for the answers.  It is a restaurant. He has no other passive income. I thought you could deduct 3K losses on passive activities. 

 

[Bart]

You can deduct 3000 loses on capital losses.  That has nothing to do with passive.

[Pacun]

52 minutes ago, Bart said:

You can deduct 3000 loses on capital losses.  That has nothing to do with passive.

I guess I associated capital losses as being passive.

[Lion EA]

But you were asking about ordinary losses on 1065 K-1 line 1, not capital losses down around line 8-9.

[Pacun]

Yes, the question is about ordinary income for a passive partner who only contributed money to the partnership.

I will wait for income to be available to deduct the suspended loss.

[Pacun]

9 hours ago, Lion EA said:

But you were asking about ordinary losses on 1065 K-1 line 1, not capital losses down around line 8-9.

Thinking about it, it seems to be a contradiction in the way this is reported.

A chef asked my client for $50K in exchange for a 10% interest in the restaurant. My client became a silent partner but he has never visited the restaurant which is about a few blocks from where he lives. To make more interesting, my client has never ever visited a restaurant but he invested the money. The contract reads that he is a 10% owner and 10% of the profits and losses belong to him.  My client has his regular W2 job. It seems to me that my client should not get money reported as ordinary income on K1s.  If the losses are not reported as "ordinary income (loss)", my client should be able to deduct up to $3K every year, correct?

If the restaurant were to be very successful and my client would get $100K, my client should not pay SE taxes, correct?

Thank you in advance.

[Abby Normal]

There is zero doubt that this is ordinary income. It is not rental income, so box 1 is correct. The two related questions are is this passive or active (definitely passive) and does SE tax apply. I've successfully argued with the IRS that a passive LLC member taxed as a partnership did not have to pay SE tax, but I've never done it with a regular partnership. This is mostly due to the fact that I've had zero regular partnerships since the mid-90s when LLCs came into existence.

[Slippery Pencil]

If it's a limited partner, se tax would not apply. 

[DANRVAN]

 

 

On 4/18/2021 at 5:30 AM, Pacun said:

It seems to me that my client should not get money reported as ordinary income on K1s.  If the losses are not reported as "ordinary income (loss)", my client should be able to deduct up to $3K every year, correct?

The term ordinary income can be confusing since it comes in different types and flavors

In the broadest sense, it is any source of income taxed at ordinary rates which basically distinguishes it from capital gains.

Ordinary income is then broken down into different class types such as rental, interest, dividends....and so on.

These classes can have different characters: such as passive, active, investment, earned, SE.....etc.

Your clients share of the income/loss is reported on his K-1 as ordinary "business" income since it is his share of the ordinary operations of the business.  

Since he is a limited partner, his income is of passive character, therefore his losses are either suspended or used to offset passive income.

On 4/18/2021 at 5:30 AM, Pacun said:

If the restaurant were to be very successful and my client would get $100K, my client should not pay SE taxes, correct?

The only way he would have SE income would be for services provided  to the business.

For example, if he decided to spend his lunch hour busting tables and received compensation, that would be classed as Guaranteed Partner Wage subject to SE tax.

[jklcpa]

Agree with Dan, except that Pacun said that the taxpayer is a general partner.   Pacun, keep in mind that the guaranteed payment of the majority partner is an expense against income to arrive at ordinary trade or business income, so it could be that the other partner paid enough in the 2020 year to create the loss you are reporting. It is possible that in a future year this partner may not draw out enough as guaranteed payments so that the restaurant shows some trade/business income, and your client's share of that will be on the K-1 and would be available to offset the loss that is being carried forward from 2020.