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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 12690
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I have a client that receives 2 x Schedule K-1’s (Form

Customer Question

I have a client that receives 2 x Schedule K-1’s (Form 1120S) – one is a manufacturing company that can claim the Domestic Production Activities Deduction (DPAD) and one is for a business rental property. My client also has a residential rental property reported on Schedule E.
I have read, “Because taxpayers are required to compute DPAD on an aggregate basis for all of their activities, passthrough entities cannot assume they do not need to compute DPAD in a loss year.” (http://www.thetaxadviser.com/issues/2014/sep/tax-clinic-02.html)
The Form 8903 Instructions say: “Under the small business simplified overall method, your total cost of goods sold and other deductions, expenses, and losses are ratably apportioned between DPGR and non-DPGR based on relative gross receipts.”
Does this mean I have to consider both K-1’s and the Schedule E when calculating the DPAD, or do I just use the information from the one K-1 from the manufacturing company?
JA: The expert will know how to help. Is there anything else important you think the expert should know?
Customer: No
Submitted: 2 months ago.
Category: Tax
Expert:  Lane replied 2 months ago.

Hi. My name's Lane.

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Is the business rental reported as passive activity?

Customer: replied 2 months ago.
Expert:  Lane replied 2 months ago.

Then you'll only use the K-1 from the manufacturing activity.

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Actually, just looked up the eligible activities, and Rental income from real property is ineligible for the deduction, regardless of material participation, so passive vs active for rental activity is irrelevant.

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Rental income from real property is also not considered as either DPGR or non-DPGR, for the same reason.

Customer: replied 2 months ago.
Just for other future clients, would you I included a second K-1 or maybe a Schedule C in the calculation if it was a retail business - again, something that would not be eligible for the DPAD.
Expert:  Lane replied 2 months ago.

Schedule C, (as long as it qualifies, as you said) yes.

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And on the K-1, yes, if it's self employment income.