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Ask Dr. Fiona Chen Your Own Question
Dr. Fiona Chen
Dr. Fiona Chen, Certified Public Accountant (CPA)
Category: Financial Software
Satisfied Customers: 355
Experience:  Former IRS Revenue Agent
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I am using TurboTax, and I want to deduct allowable

Customer Question

I am using TurboTax, and I want to deduct allowable investment interest expense from Form 4952 on Sch. E, not Sch. A.
JA: The accountant will know how to help. Please tell me more, so we can help you best.
Customer: TurboTax seems to automatically transfer Form 4952, line 8, to Sch. A, line 14. I would like this allowable investment interest expense to flow to Sch. E , Part II, Column (h).
JA: Is there anything else important you think the accountant should know?
Customer: No.
Submitted: 29 days ago.
Category: Financial Software
Expert:  emc011075 replied 29 days ago.

Hi. My name is ***** ***** I will be happy to help you.

What are the expenses for? What is the related income?

Customer: replied 29 days ago.
I have investment interest expense paid (or accrued) in the current year (Form 4952, line 1) as well as disallowed inv. int. exp. from the prior year (Form 4952, line 2). They are fully deductible on Sch. E. However, TurboTax automatically transfers them to Sch. A. I'd like to know how to manipulate TurboTax, so that these investment interest expenses carry through to Sch. E.
Expert:  emc011075 replied 29 days ago.

Only expenses related to royalty income will go on Schedule E. If that's the case you will have to enter it manually on Schedule E (as negative income). All other expenses related to passive income is reported on schedule A. All investment expenses related to active income are reported on appropriate schedule C or F.

Customer: replied 29 days ago.
I understand tax law, and I know exactly where these expenses should go. I just need to know how to get TurboTax to do as I want!
Customer: replied 29 days ago.
My question is not a matter of tax law--it's a TurboTax question and getting it to do what I want. However, TurboTax customer service won't be open until tomorrow, and I need my answer now.
Customer: replied 29 days ago.
Line 1 comes from a current Sch. K-1, and Line 2 is from last year.
Expert:  emc011075 replied 29 days ago.

Turbo tax is Intuit retail version and is meant for nonprofessionals, which means your override options are limited. Customer service will most likely not help you with that. Unless you can enter it as negative income directly on Schedule E you will have to look for different program.

I will opt out and request your category to be changed to financial software.

Customer: replied 29 days ago.
Okay. Thanks.
Expert:  Dr. Fiona Chen replied 29 days ago.

Dear Customer,

1) If you look at Schedule A, line 14, Form 4952 will flow here.

2) Schedule E, Part II. is Income or Loss From Partnerships and S Corporations, which has to flow from K-1s.

3) Column (h) is (h) Nonpassive loss from Schedule K-1. It is not investment interest.

4) "They are fully deductible on Sch. E" -- this statement is untrue. Part II has to be flow through from a K-1 from an S corporation or partnership.

5) If we look at a K-1 instruction, for example, on Partnership Form 1065 K-1, line 13, Other Deductions, code H, Investment Interest Expense, will be applied at the partner's level to Form 4952, line 1 and be flowed to Schedule A.

https://www.irs.gov/pub/irs-pdf/f1065sk1.pdf

6) The software is correctly following the tax law. It is because no matter how much at the partnership or S Corporation level, the investment interest was spent, the deductible amount is limited at the individual partner or the shareholder's level. It is not a direct deduction.

7) Yes, non passive loss is deductible. But investment interest expense is not non passive loss. Because investment returns are with many different tax treatments, it is not the same as business income, which is regular income, then, business expenses can be used to deduct business income as regular deductions.

Please feel free to follow up.

Regards,

Fiona

Fiona Chen, MPA, Ph.D., CPA, ABV, CFF, CITP

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