Can I request from the IRS a change in our entity status-Part II, line 11 on K-1. Nothing else will change on our or our partners K1's.If so, I assume I will need to create a 1040X as the active loss when I reported it on our 1040 created a NOL that I did not need.We had zero tax liability from 2010-2013 without this loss.===> A partner's income or loss from a partnership is the partner's distributive share of partnership items for the partnership's tax year that ends with or within the partner's tax year; Generally,tax law limits the amount a partner can deduct for passive activity losses and credits. The passive activity limits do not apply to the llc. Instead, they apply to each partner's share of income, loss, or credit from passive activities. Because the treatment of each partner's share of partnership income, loss, or credit depends on the nature of the activity that generated it, the llc must report income, loss, and credits separately for each activity. Therefore, a taxpayer CAN deduct the current year losses against salary and other investment income in the right circumstances . The IRS says that if you materially participate in the partnership, and the business has a loss, you can deduct the full amount of the loss on your tax return aslongas you have taxable income as you said, but this is not your case since your tax was zero w/o NOL. If you do not materially participate that is, your activity is passive, you cannot deduct losses in the same way as if you were materially participating.
Would I do a 1040X and attach a corrected Schedule E and a form 8582 (can't use the loss yet.) Would I also send the original K1?===>>I guess it’s important that the person seeking to transition out of the daily operations of the business be comfortable with the terms that are agreed upon; getting the proper legal/professional counsel to move forward with a silent partner arrangement is essential ;aslongas the parties are conducting business as a general partner wants to become a silent partner, the entity structure will need to be changed to accommodate limited liability and elimination of management duties as desired by the silent partner;the IRS doesn't have a category for partner’s status; a taxpayer can be a “limited partner” of an L.L.C. under state law, but be a “general partner” of the same legal entity for purposes of the passive loss rules, if you otherwise meet the material participation rules by spending a required amount of hours in the activity/business. The IRS has long taken the position that losses generated by businesses held within L.L.C.s can’t be used to offset a taxpayer’s salary and investment income in the same year and same tax return. They are “passive losses” and therefore, “limited” and carryover for possible deduction in future years when the passive activity has income, is sold or is liquidated.
Generally, a partner's share of the partnership loss (including capital loss) is allowed only to the extent of the adjusted basis of his or her partnership interest at the end of the partnership's tax year in which the loss occurred (but before reduction by the current year's loss). This is not necessarily the same as the balance in the partner's capital account. Any excess,in your case as you have no tax liability offsetting against the NOL as an active status partner, is allowed as a deduction in later years to the extent that your basis is increased above zero.your allowable loss may be deducted by you on your 1040 as a business loss, subject to the passive activity rules. Although the llc itself may not carry the loss backward or forward to other years as a net operating loss, your shares of the loss may result in NOL carrybacks or carryovers on your 1040s.