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