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USTaxAdvising
USTaxAdvising, CPA
Category: Tax
Satisfied Customers: 1084
Experience:  US Taxation specialist.
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This is the fact pattern. The Client receives a K-1 from

Resolved Question:

This is the fact pattern.
The Client receives a K-1 from a jointly held business (50%) with a loss of $2,597.
The client has 2 schedule C businesses - one had a profit of $18,250, one showed a loss of $1,617 which nets to a profit of $16,633
The client has rental property. At year end 2010 there were suspended losses $35,023.
In 2011 there were losses of $33,382 and a profit of $5,233 - net $28,149 loss

The 1040 is correctly showing the gain from schedule c of $16,633
Line 17, rental gain and loss, is showing a loss of $43,250. I thought the maximum deduction was $25,000.

What am I missing?
Submitted: 1 year ago.
Category: Tax
Expert:  USTaxAdvising replied 1 year ago.

USTaxAdvising :

Hello,

USTaxAdvising :

You are correct that the maximum allowable loss is 25K for passive activities where the taxpayer is actively involved.

USTaxAdvising :

Perhaps you have coded, or the taxpayer is a real estate professional? If that is the case the rentals would not be considered passive but would non passive instead. (thus the limitation would not apply)

USTaxAdvising :

Perhaps you may have inadvertently coded one of the activities as disposed and thus all the losses are released?

USTaxAdvising :

based on the facts I don't see how you are getting an allowable loss of 43,250. - If the losses are from rental activities it should be limited to 25K.

USTaxAdvising :

I hope this helps, please let me know if you have any further questions.


 


Best regards,

JACUSTOMER-yfx9vnug- :

Thank you for your response. I have a follow up queston below.


 


The two schedule c businesses are considered passive income. They showed a profit of $18,350 and a loss Of $1,617 respectively for a net of $16,633. Since all items are passive would't you want to net lines 12 ($16,633) and 17 ($43,250) on the face of the 1040, not to exceed the $25,000 I limit..

Expert:  USTaxAdvising replied 1 year ago.

Hi Steve,

 

I don't know why your software is stating that a 43K loss is allowed.

 

The 25K loss allowance is only for rental real estate for which the taxpayer actively manages. It does not apply to every property but instead is used in aggregate. For example if the taxpayer has several rentals which he/she actively manages and all generate losses in excess of 25K separately only 25K is allowed, not 25K per property.

 

The 25K allowance does not apply to Schedule C activities.

 

I hope this helps. Please let me know if you have any further questions.

 

Best regards,

Customer: replied 1 year ago.

If you net line lines 12 and 17 on the 1040 it equals the total of column C from worksheet 4 of the 8582, which is $24,543. Also, all activities are passive with no activity having "Material Actvity". What I am having trouble wrapping my arms arount is if you net the activities you are under the $25K passive loss write off. Maybe it is a software issue but the answer is correct, just split in two different places

Expert:  USTaxAdvising replied 1 year ago.

The 25K loss allowance is only allowed for rental real estate where the taxpayers are actively participating. If the Schedule C is being used in the calculation of the 25K loss I would think that something is wrong with the calculation.

 

Having said that I generally I trust the software, it is smarter than I am most of the time. But when something doesn't seem right I go back and double check everything.

 

 

Customer: replied 1 year ago.

I have spoken with the IRS and the tax department at my software vendor. The critical point is that the schedule "C" business is one in which the client does not materially participate. The lack of material participation makes the schedule "C" business a passive activity. This results in the reporting of the business income which is presented on the 1040 and the increased passive loss in much the same way a profitable property decreases the losses for all properties. However, because it is a schedule C the income needs to be reported as well but the net cannot exceed $25,000. Does that make sense to you?

Expert:  USTaxAdvising replied 1 year ago.

Sorry it has taken me so long to get back to you. It has been a busy few days. Anyhow....

 

Does that make sense to you? - Somewhat yes. But it sounds like the total passive income is being netted together and then the 25K loss threshold is being applied to the rental real estate activity. I don't feel this is correct. You are allowed the 25K loss on the rentals then you can apply the other Sch C passive income. You have to order the rental loss first, apply the 25K loss threshold, then use the Schedule C to offset the loss.

 

I would expect the Sch E line 17 to be (25,000) and Sch C line 12 to be 16,633.

 

What software are you using? I have used ProSystem for a number of years and they do make mistakes. I found an error with their Form 8621 once before...

 

Sorry this is dragging but I believe something is wrong with the ordering application of the 25K loss.

 

 

 

 

USTaxAdvising, CPA
Category: Tax
Satisfied Customers: 1084
Experience: US Taxation specialist.
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