Is this the correct way to release suspended Passive Losses?

[BulldogTom]

New Client.   6 K-1s.   All passive.   Has 2018 passive losses carried forward into 2019 year.   Net 2019 passive income of 4K.  Prior preparer 2019 tax return shows Sch E pg 2 income of 4K and 4797 loss of 4K.   Is that the correct way to present this on the return?   

Thanks

Tom
Longview, TX

 

[jklcpa]

The passive loss on 4797 would be first subject to the at-risk limitations and then the passive activity rules.  The transactions are reported on their respective forms for the type of transaction, so yes, there would be both Sch E and the 4797.  There should also be a Form 8582 and its worksheets that calculate what portion of the losses are allowed and the portion disallowed that will carryforward.  If the sale was a complete disposition, the software would have a checkbox or some way to indicate that so that the loss from that activity would be allowed in full, and that would also be run through the 8582 calculations. 

[BulldogTom]

There is no sale, which is what has me confused.   There is a form 8582 with the prior year carryforwards, worksheet 7 filled out and showing the Wkst 7 part of the loss going to 4797.   

Why is it not just coming through the Sch E pg 2 with the detail coming from the 8582?   It seems like that would be the way to go.  I see no sales, therefore no reason for the 4797 to come into play.

Thanks for chiming in Judy.

Tom
Longview, TX

[jklcpa]

Was it remaining basis of depreciable property written off as scrapped or when it was replaced?  That would also be on 4797 and not be a complete disposition.

[Abby Normal]

K1s often have both suspended ordinary losses and capital losses, so when income arises, you take a pro rata share of the suspended losses. In this case it seems, all the suspended losses were 4797 losses.

[Sara EA]

You don't say what the K-2s are from.  If publicly traded partnerships, losses can only be netted against gains from the same partnership. Say basis was zeroed out in 2018 so $4k loss was carried forward. Income of $4k in 2019 would release the $4k loss carried over.  A sale would release all the losses, but you said there was none so the presence of a 4797 is confusing.

[BulldogTom]

21 hours ago, Abby Normal said:

K1s often have both suspended ordinary losses and capital losses, so when income arises, you take a pro rata share of the suspended losses. In this case it seems, all the suspended losses were 4797 losses.

I don't have any prior returns.   The client provided 2019 and 2020.   There are no capital losses on either year's K-1s, everything is ordinary profit or loss.   If you are correct and they are prior year capital losses, is there anywhere in the tax return forms where I could find that without asking the client to go back more years of K-1s?  

11 hours ago, Sara EA said:

You don't say what the K-2s are from.  If publicly traded partnerships, losses can only be netted against gains from the same partnership. Say basis was zeroed out in 2018 so $4k loss was carried forward. Income of $4k in 2019 would release the $4k loss carried over.  A sale would release all the losses, but you said there was none so the presence of a 4797 is confusing.

Not PTPs.  

I wonder if this is a way for the prior preparer to show the profits on the K-1s on the expected line on the return and the suspended losses coming out on another line?   A way of explaining how you have income on the K-1s for the year but are not showing any on the return - hoping to keep the dreaded computers from sending you a letter that you underreported K-1 income?

Here is what I think I am going to do.   Treat all the passive losses as ordinary moving forward.  I don't see anything that tells me this is anything other than ordinary suspended passive losses and I will offset them against passive income.

Anyone object to this treatment?

Thanks again for chiming in.   I appreciate you all.

Tom
Longview, TX

 

[BulldogTom]

@jklcpa

Would a distribution from the partnership release suspended passive losses?

Tom
Longview, TX

[Abby Normal]

57 minutes ago, BulldogTom said:

@jklcpa

Would a distribution from the partnership release suspended passive losses?

Tom
Longview, TX

I don't see how. Distributions reduce basis, but no below zero. Distributions in excess of basis are capital gains, but as far as I know, that isn't passive income, so no passive losses will be released.

[Abby Normal]

On 1/4/2022 at 8:43 AM, BulldogTom said:

If you are correct and they are prior year capital losses, is there anywhere in the tax return forms where I could find that

That's like trying to do a puzzle without all of the pieces. There's probably no difference in tax if you just assume the carryover losses are all ordinary. What I don't quite get is how you can know the total amount of the carryover losses without having the detail.

[Lee B]

6 minutes ago, Abby Normal said:

1 hour ago, BulldogTom said:

 

Would a distribution from the partnership release suspended passive losses?

 

Passive Income or full disposition of the related property. Also passive losses don't vanish upon death.

[Terry D EA]

Hi Tom,

I'll put my 2 cents worth in. First, I agree with all of the previous responses you received. Personally, I would want to see all of the previous worksheets regardless of what the taxpayer has to do to get them. They were his at the time the returns were prepared anyway. Like you, why does the 4797 exist if there were no sale or a scrapped asset? Abby is correct distributions reduce basis and I don't see how they would release the suspended losses either. It sounds as though the previous preparer may have been confused as well or maybe they were privy to information you don't have. Can you see the K-1 forms from the previous years? That may help with deciding what to do. Your idea of assuming ordinary passive losses and netting the losses against ordinary income in the future would seem to be the best approach. However, I would want to cover my *&^ a bit. I literally hate that word assume.

[jklcpa]

@BulldogTom Sorry, just now seeing this again. I agree with Abby Normal that the allocated loss being allowed up to the $4K probably was a 4797 suspended loss from a prior year.  

I also agree with his answer to your distribution question.

I'd be happy to take a look at the returns for you if you think that would help. Black out the names, address and ssn# and email to me if you want. Let me know and I'll send you my email address by PM.

[BulldogTom]

18 hours ago, Abby Normal said:

I don't see how. Distributions reduce basis, but no below zero. Distributions in excess of basis are capital gains, but as far as I know, that isn't passive income, so no passive losses will be released.

@Abby NormalThanks for confirming my understanding.

18 hours ago, Abby Normal said:

What I don't quite get is how you can know the total amount of the carryover losses without having the detail.

The 8582 is attached and there is a schedule attached as well showing the prior year total un-allowed losses.

There is no schedule to support the 4797 entries.   The 8582 has two K-1s in the section for losses from 2 schedules on page 3, worksheet 7.   There is a ratio on worksheet 7, I guess I could use the amount claimed divided by the amount claimed to come up with the amount of the carryforward.   Seems sketchy to me to do it that way.

10 hours ago, jklcpa said:

@BulldogTom Sorry, just now seeing this again. I agree with Abby Normal that the allocated loss being allowed up to the $4K probably was a 4797 suspended loss from a prior year.  

I'd be happy to take a look at the returns for you if you think that would help. 

@jklcpaThank you for that generous offer, but I don't feel right sending this off without client consent, even blacked out.

Thank to all of you for your input.   I think I just need to have the client get me a supporting schedule for the "mysterious prior year un-allowed 4797 loss".

Tom
Longview, TX

[jklcpa]

1 hour ago, BulldogTom said:

The 8582 has two K-1s in the section for losses from 2 schedules on page 3, worksheet 7.   There is a ratio on worksheet 7, I guess I could use the amount claimed divided by the amount claimed to come up with the amount of the carryforward.   Seems sketchy to me to do it that way.

Tom, that is exactly how the loss carryforward is calculated.  On the 2019 return, Form 8582 pg 3, wksht 7, the net total of the current and prior years is shown in column b, the ratio in col c, the allowed loss for 2019 would be at far right in col e, and the carryforwards to 2020 should be in col d. Worksheet 7 for the 2019 return has subsections for each type of loss (from Sch E or from 4797) that should have the ratios and amounts for each type. Are there no entries shown there in col d? 

[BulldogTom]

1 hour ago, jklcpa said:

Tom, that is exactly how the loss carryforward is calculated.  On the 2019 return, Form 8582 pg 3, wksht 7, the net total of the current and prior years is shown in column b, the ratio in col c, the allowed loss for 2019 would be at far right in col e, and the carryforwards to 2020 should be in col d. Worksheet 7 for the 2019 return has subsections for each type of loss (from Sch E or from 4797) that should have the ratios and amounts for each type. Are there no entries shown there in col d? 

Yes, there are amounts.   How do I get the amounts into Worksheet 7 though?  In ATX, you can't touch the schedule directly, it all has to flow in from the 4797 and I don't see a place in the 4797 to bring in a carryforward loss that can flow to the 8582 worksheet 7 and then over to the Sch E pg 2.

You are amazing and thanks so much for the help.

Tom
Longview, TX

[jklcpa]

38 minutes ago, BulldogTom said:

Yes, there are amounts.   How do I get the amounts into Worksheet 7 though?  In ATX, you can't touch the schedule directly, it all has to flow in from the 4797 and I don't see a place in the 4797 to bring in a carryforward loss that can flow to the 8582 worksheet 7 and then over to the Sch E pg 2.

You are amazing and thanks so much for the help.

Tom
Longview, TX

Sorry I can't help with the ATX input. Isn't there a tab to a worksheet where items for basis, at-risk, and carryovers are entered?  There are many items that could be disallowed to carryover or track now, so I can't believe there isn't an area for these. 

 

Tom, found this that shows where to enter Sch E prior year losses coming forward:

 

Edited January 23, 2022 by jklcpa
added link to other topic

[mircpa]

@BulldogTom

I read through this thread. If I would have been in your place I would have addressed root cause of the problem which is dug more further backwards to figure out where 4797 amounts are coming from. It could be that previous preparer might have incorrectly included those forms in filing. You might as well have to amend previous years if need be.

[schirallicpa]

I also think you need to dig for more info.  I think - unless it's a preparer that is part of this group - most people don't understand passive losses and have no clue how to handle carryforwards and application on the taxreturn.

[BulldogTom]

The client has the supporting documentation.   2016 losses.   I think I can do this if I can figure out how to get the software to do what my brain wants the outcome to look like.

Thanks to all of you.   This board is invaluable.

Tom
Longview, TX