Welcome Guest. Register Now!  



Reply
 
LinkBack Thread Tools Search this Thread Display Modes
  #1 (permalink)  
Old 03-14-2014, 06:55 PM
StinkyTaxLaw
 
Posts: n/a
Question Passive or Non-passive determination

A is a non-passive general partner of X LLC, which invests in Y and Z partnerships. Year end, X LLC receives two Schedules K-1 from Y and Z, in which all the income/loss flow through to X LLC's Form 1065. When A reports the income/loss from X LLC's K-1 on his Form 1040, should he treat all the items as passive income/loss (ordinary business income, COD income, Sec 1231 Loss, Misc Business Deductions) because he doesn't participate in Y and Z? Ultimately, does the characteristic of other partnerships remain as is once it gets to Form 1040? Or is it determined at the individual Form 1040 level no matter what type of business the LLC is involved in?



Digg this Post!Add Post to del.icio.usBookmark Post in TechnoratiFurl this Post!Reddit! stumble!bookmark in google!Share on Facebook!
Reply With Quote
  #2 (permalink)  
Old 03-15-2014, 03:56 AM
Moderator
 
Join Date: Oct 2010
Posts: 5,233
Quote:
Originally Posted by StinkyTaxLaw View Post


#1;A is a non-passive general partner of X LLC, which invests in Y and Z partnerships. Year end, X LLC receives two Schedules K-1 from Y and Z, in which all the income/loss flow through to X LLC's Form 1065. When A reports the income/loss from X LLC's K-1 on his Form 1040, should he treat all the items as passive income/loss (ordinary business income, COD income, Sec 1231 Loss, Misc Business Deductions) because he doesn't participate in Y and Z?


#2;Ultimately, does the characteristic of other partnerships remain as is once it gets to Form 1040? Or is it determined at the individual Form 1040 level no matter what type of business the LLC is involved in?
#1; Partners receiving a Sch K-1 from a partnership, and LLC members receiving a K-1 from a mmLLC must report the amounts on IRS Form 1040 Sch E, page 2.Generally speaking, ordinary net business income is reported on Sch E. Other income items are reported in the appropriate part of the 1040 tax return. For example, interest and dividends passed-through by an mmLLC or partnership are reported on Sch B. Capital gains/losses are reported on SchD/8949.
#2; I guess so. K-1 form that is sent to you represents your share of the distributed share of profits and loss, along with certain special items such as section 179 depreciation expense. This information from the K-1 has to be reported on Sch E of your form 1040. Usually when you present this form to your tax preparer he will be able to process this information for you. But, please pay special attention to losses on your K-1, sometimes these losses are not deductible on your tax return due to Basis / passive loss/at risk Limitations.



Digg this Post!Add Post to del.icio.usBookmark Post in TechnoratiFurl this Post!Reddit! stumble!bookmark in google!Share on Facebook!
Reply With Quote
  #3 (permalink)  
Old 03-15-2014, 07:46 AM
StinkyTaxLaw
 
Posts: n/a
So is A reporting the income from X LLC as nonpassive because he participates, or passive because income is indirectly passed through to him from other partnerships that his X LLC invests in?

Thanks.



Digg this Post!Add Post to del.icio.usBookmark Post in TechnoratiFurl this Post!Reddit! stumble!bookmark in google!Share on Facebook!
Reply With Quote
  #4 (permalink)  
Old 03-16-2014, 02:27 AM
Moderator
 
Join Date: Oct 2010
Posts: 5,233
Quote:
Originally Posted by StinkyTaxLaw View Post
So is A reporting the income from X LLC as nonpassive because he participates, or passive because income is indirectly passed through to him from other partnerships that his X LLC invests in?

Thanks.
If you are actively involved in running a partnership, in addition to income taxes, the IRS requires you to pay "self-employment" taxes on all partnership profits allocated to you. ALSO partners who are not employees of the partnership are considered self-employed and must pay self-employment tax on net earnings in lieu of employment tax. A partner is not an EE of the partnership. The partner's distributive share of ordinary income from a partnership is generally included in figuring net earnings from self-employment. However, a limited partner generally does not include his /her distributive share of income or loss in computing net earnings from self-employment. This exclusion does not apply to guaranteed payments made to a limited partner for services actually rendered to or on behalf of a partnership engaged in a trade or business. Because any general partner can act on behalf of the entire business without the knowledge or permission of the other partners, being a general partner offers poor asset protection.



note;just for reference,When you receive guaranteed payments, it's part of your ordinary income; the Partnership treats that as an expense while the Partner receiving the guaranteed payment is treating it as part of Ordinary Income. Guaranteed Payments have no affect on the Partner's basis. Let's say a partner receives $20k of GP. That $20k will not increase nor decrease the basis. It will reduce the Ordinary Income of the partnership, thus reducing your share of the Ordinary Income. Therefore, your basis won't increase as much as it would have had you not had a GP. So I guess GP doesn't directly affect your basis. Partners earn income/get taxed on it even if they don't withdraw it. HOwEVER, technically, Guaranteed payments are deducted by partnerships to get to ordinary income. The ordinary income which includes the GP deduction is then distributed to each partner, which we know actually affects their basis.



Digg this Post!Add Post to del.icio.usBookmark Post in TechnoratiFurl this Post!Reddit! stumble!bookmark in google!Share on Facebook!
Reply With Quote
  #5 (permalink)  
Old 03-16-2014, 08:35 AM
StinkyTaxLaw
 
Posts: n/a
Your answer is irrelevant to my question. Thanks for the effort though. I practice tax law as a profession, so I actually knew the answer before I even asked. I posted the question because some big shot CPA is arguing with me on this.



Digg this Post!Add Post to del.icio.usBookmark Post in TechnoratiFurl this Post!Reddit! stumble!bookmark in google!Share on Facebook!
Reply With Quote
Ads
Reply


Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

vB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Income exceeds $150,000. Why doesn't Turbotax offset passive losses from one rental property against passive income from second rental property? aboniadi Rental Real-Estate 4 03-17-2014 02:15 AM
Passive activity loss carry over nbalu1974 Rental Real-Estate 1 02-23-2014 06:41 AM
Passive Income as a Sole Prop. lewgard Sole-Proprietorship 1 02-14-2012 11:39 PM
Carryover passive losses Kasturi Rental Real-Estate 1 03-23-2011 09:56 PM
Section 179 deduction for passive loss luppie Rental Real-Estate 1 09-16-2007 10:54 PM

Follow us on Facebook Follow us on Twitter Google Buzz Rss Feeds

» Categories
 
Individual
 » Income
 » IRA/Sep
 » Medical
 
Corporations
 » Payroll
 
Forum for CPAs
 
Financial Planning