If your Federal Partnership Schedule K-1 (Form 1065) Partner’s Share of Income, Deductions, Credits, etc. from a Publicly Traded Partnership (PTP) reflects a loss in Box 11F for Other Loss that falls under IRS regulation 1.469-1T(e)(6), this amount should be reported as a nonpassive loss on Federal Schedule E Supplemental Income and Loss, Page 2, Line 28, Column (h) if your partnership is directly in the business of trading stocks.
Per IRS Passive Activity Loss Audit Technique Guide, page 126:
TRADERS IN STOCKS AND BONDS
If a partnership or S Corporation is actively trading property such as stocks or bonds for the account of the taxpayer/owner, the losses (or income) are non-passive under Reg. § 1.469-1T(e)(6). Neither income nor losses belong on Form 8582. Even if the taxpayer is a limited partner, he may deduct losses from a partnership which trades in stocks and bonds on his account. Losses from an entity which trades in stocks and bonds belong in the non-passive column of Schedule E.
Income from a trading partnership should not be on Form 8582 line 3a. Trading activities are not passive activities. Thus the income, even if the taxpayer performs no work, cannot be passive income. Clues the entity may be a trading activity: name containing "investment", “equity”, "securities", "financial", "hedging", "XXX fund", etc. Furthermore, most trading partnerships use 523900 as the business code in block C on Form 1065.
To enter this non-passive amount into the TaxAct® program:
- From within your TaxAct return (Online or Desktop), click Federal (on smaller devices, click in the top left corner of your screen, then click Federal).
- Click the Business Income dropdown, then click Partnership income (Form 1065 Schedule K-1).
- Click + Add Partnership Schedule K-1 to create a new copy of the form or click Edit to review a form already created (desktop program: click Review instead of Edit).
- Continue with the interview process until you reach the screen titled Partnership - Publicly Traded Partnership, then click the circle next to Yes.
- On the screen titled Partnership - Other Passive Income or Loss, enter your information in the fields.
Continue with the interview process until you reach the screen titled Partnership - Summary, then click + Add Partnership Schedule K-1 to create a second copy of the form
- On the screen titled Partnership - Business Name, enter the partnership information (i.e. Name and EIN) the same as it appears on your Schedule K-1.
- On the screen titled Partnership - Publicly Traded Partnership, click the circle next to No to indicate the partnership is NOT a PTP.
- On the screen titled Partnership - Schedule K-1 Information, check Box 1 - Ordinary business income (loss).
- On the screen titled Partnership - Ordinary Income, enter the 1 - Ordinary income or loss amount as a negative amount.
- On the screen titled Partnership - Material Participant, click the circle next to Material participant, then click Continue as this will allow the loss to be reflected as a nonpassive loss on Schedule E, page 2.
Per IRS Instructions for Form 8582, page 13:
Special Instructions for PTPs
Section 469(k) provides that the passive activity limitations must be applied separately to items from each PTP. PALs from a PTP generally may be used only to offset income or gain from passive activities of the same PTP. The special allowance (including CRDs) for rental real estate activities doesn’t apply to PALs from a PTP.
Passive activity loss rules for partners in PTPs. Don’t report passive income, gains, or losses from a PTP on Form 8582. Instead, use the following rules to figure and report your income, gains, and losses from passive activities you held through each PTP you owned during the tax year.
- Combine any current year income, gains and losses, and any prior year unallowed losses to see if you have an overall loss from the PTP. Include only the same types of income and losses you would include to figure your net income or loss from a non-PTP passive activity. See Passive Activity Income and Deductions, earlier.
- If you have an overall gain, the net gain portion (total gain minus total losses) is nonpassive income.
It’s important to figure the nonpassive income because it must be included in modified adjusted gross income to figure the special allowance for active participation in a non-PTP rental real estate activity on Form 8582. Also, you may be able to include the nonpassive income in investment income when figuring your investment interest expense deduction. See Form 4952, Investment Interest Expense Deduction.
Report all gains and allowed losses from the activity on the forms or schedules normally used, and to the left of each entry space, enter “From PTP.”
- If you have an overall loss (but didn’t dispose of your entire interest in the PTP to an unrelated person in a fully taxable transaction during the year), the losses are allowed only to the extent of the income, and the excess loss is carried forward to use in a future year if you have income to offset it. Report as a passive loss on the schedule or form you normally use the portion of the loss equal to the income. Report the income as passive income on the form or schedule you normally use.
If you have unallowed losses from more than one activity of the PTP or from the same activity of the PTP that must be reported on different forms or schedules, allocate the unallowed losses on a pro rata basis to figure the amount allowed for each activity or on each form or schedule.
List each activity of the PTP in Worksheet 5. Enter the overall loss from each activity in column (a). Complete column (b) of Worksheet 5 according to its instructions. Multiply the total unallowed loss from the PTP by each ratio in column (b) and enter the result in column (c) of Worksheet 5.
Next, complete Worksheet 6 for each activity listed in Worksheet 5 if all the loss from that activity is reported on one form or schedule. Use Worksheet 7 instead of Worksheet 6 for each activity with losses reported on two or more different forms or schedules (or are identified separately on the same form or schedule). Enter the net loss plus any prior year unallowed losses in column (a) of Worksheet 6 (or line 1a, column (a), of Worksheet 7, if applicable). The losses in column (c) of Worksheet 6 (column (e) of Worksheet 7) are the allowed losses to report on your forms or schedules. Report these losses and any income from the PTP on the forms and schedules normally used.
- If you have an overall loss and you disposed of your entire interest in the PTP to an unrelated person in a fully taxable transaction during the year, your losses (including prior year unallowed losses) allocable to the activity for the year aren’t limited by the passive loss rules. A fully taxable transaction is one in which you recognize all your realized gain or loss. Report the income and losses on the forms and schedules normally used.
For rules on the disposition of an entire interest reported using the installment method, see Disposition of an Entire Interest, earlier.
Note. The TaxAct program has a PTP Worksheet it uses to make the calculations mentioned previously.
Note that any link in the information above is updated each year automatically and will take you to the most recent version of the webpage or document at the time it is accessed.