Posts Tagged ‘at-risk’

Tax Roundup, 3/28/16: Can I deduct that K-1 loss now, later, or never?

Monday, March 28th, 2016 by Joe Kristan

20161120s k-1 cornerBasis, At-Risk, Passive. The Schedule K-1 forms issued to owners of S corporations and partnerships might be the most confusing of the information returns we use to compute our 1040s. That’s because they can embody a lot of obscure tax law that goes into determining how partnership and S corporation income is taxed.

Partnerships and S corporations are “pass-through entities.” That means they normally don’t pay tax on their income. I instead “passes through” to the tax returns of their owners, the partners and shareholders. The owners report the income — and they also deduct the losses. But when they deduct the losses can be very confusing.

Search engine queries related to K-1 losses are one of the Tax Update’s biggest traffic sources, so it seems wise to give the Googlers what they want. Today we will give an overview of the three hurdles taxpayers must clear before they can deduct a K-1 loss. In the coming days we will spend a little more time on each hurdle, and I will update this post with links to those posts, but today we’ll stick to the big picture.

Start with your basis. The tax law first requires you to have enough “basis” in your partnership interest or S corporation stock (or debt, sometimes) to deduct the loss. If you start the year with $1,000 in basis, you have the potential to deduct $1,000 of losses — if you clear the next two hurdles. But if you don’t have basis, you go no further with your loss.

“Basis” can be complicated, but in most cases, it starts with your investment in the pass-through entity. It is increased by income and further investments, and decreased by losses and distributions.

Is your basis “at-risk”? The at-risk rules sometimes seem like a historical curiosity, like gas lines or 8-track tapes. They were enacted in the Ford Administration to attack that era’s mass-marketed tax shelters. But while obscure, they still count.

They add an additional requirement to the rules that require you to have basis to take a loss. They add a rule requiring that basis to be “at-risk.” While some of the rules can be obscure and arbitrary, the basic idea is that if you can’t really lose your own money on the deal, you shouldn’t be allowed a loss, except to the extent the deal generates income in the future. It also treats loans from some related parties or others with interests in the deal as not “at-risk.”

Is your loss “passive?” If you clear the first two hurdles, you still have to contend with the “passive loss” rules. These were enacted to fight the tax shelters of the 1980s by deferring “passive” losses until the taxpayer has “passive” income, or until the “passive activity” (still my favorite tax oxymoron) is sold. Whether an activity is “passive” is usually determined based on how much time you spend during the year working in it. Rental activities are automatically passive for taxpayers other than “real estate” professionals.

Updates in the series:

3/29/16: How you figure S corporation stock basis

How loans to your S corporation can give you basis.

This is another of our irregular series of 2016 filing season tips. We’ll be doing these right up through the April 18 deadline. 




Andrew Mitchel, Section 911 Housing Cost Amounts Updated for 2016:

Code §911(a) allows a qualified individual to elect to exclude from gross income an “Exclusion Amount” related to foreign earned income and a “Housing Cost Amount.” The Exclusion Amount for 2016 is $101,300.

Mr. Mitchel goes on to explain the more complicated housing cost amount.

Kay Bell, Problems with prepaid card tax refunds. “But there’s one big problem with these cards. Tax crooks absolutely love them”

Jason Dinesen, Glossary: Iowa Tuition & Textbook Credit. “Almost any expense counts toward the credit.”

Kyle Pomerleau, Why We Should Care About More Than Just Distributional Tables. “Growth, distribution, and revenue are all important aspects of tax policy. If we only focus on one, we miss important policy nuances.”

TaxGrrrl, IRS Commissioner Admits IRS Isn’t A Favorite, Talks Tax Refunds, Budget & Taxpayer Services:

Noting that “the IRS is not anyone’s favorite government institution, and we will not win any popularity contests, especially in an election year,” the Commissioner went on to share that a recent poll indicated that 12% of taxpayers liked Russia’s Vladimir Putin better than the IRS.

A Tax Notes story ($link) about Koskinen’s speech quotes him as saying, “But don’t look for a shot of me on CNN, without a shirt, riding a horse.” I don’t think anyone would actually look for such a thing.




David Henderson, To Address the Top One Percent, Allow Competition (Econlog, quoting Jonathan Rockwell):

For lawyers, doctors, and dentists– three of the most over-represented occupations in the top 1 percent–state-level lobbying from professional associations has blocked efforts to expand the supply of qualified workers who could do many of the “professional” job tasks for less pay.

The IRS and its friends in the national tax prep franchise firms want to do the same thing with the tax prep business via their push for preparer regulation.


TaxProf, The IRS Scandal, Day 1052Day 1053Day 1054. The Day 1053 link is to It’s Been 513 Days Since Any Big 3 Network Has Touched the IRS Scandal. It’s been longer than that since I’ve watched a Big 3 network news show.

Peter Reilly, Sixth Circuit Looking To Protect Taxpayers From IRS Not IRS From Taxpayers. Peter still thinks the IRS is being picked on.


What are these “results” of which you speak? Results Only Work Environments (Caleb Newquist, Going Concern).




Understanding your partnership K-1: can you deduct that loss?

Tuesday, April 3rd, 2012 by Joe Kristan

Flickr image by naotakem under Creative Commons licenseLife is always easier when you’re making money.  The problems of prosperity are much more pleasant than those of poverty.  That’s also true when your partnership is losing money. 

Yesterday we showed how a K-1 works.  Today we cover the special problems of K-1s that show losses.  Just as the owners of a partnership pay income taxes on partnership income, they get to deduct the losses, too, right?

It depends.  There are three hurdles that a K-1 recipient has to clear to deduct K-1 losses. 

The first hurdle is basis. Your basis starts with your investment in the K-1 business; it is increased by income and cash contributions and decreased by losses and distributions. In partnerships  — but not S corporations — an owner’s basis may include a portion of the company’s borrowings from third parties.

Unfortunately, the K-1s do a poor job of tracking owner basis.  You, or your tax preparer, may need to keep a separate schedule of your basis to determine whether you might deduct K-1 losses.

The next hurdle is whether your basis is “at-risk.” The “at-risk” rules are an obscure leftover of tax shelter battles of the 1970s, but they still apply.They can be very complex, but their gist is that if your basis is attributable to borrowings that are “non-recourse” — that you aren’t personally liable for — it is not “at risk,” and losses attributable to that basis must be deferred. You may also not be considered “at risk” for related-party borrowing, especially if you borrow from your business or from a business associate to fund your ownership in the K-1 issuer.

Partnership K-1s provide some useful information in determining whether you have an “at-risk” issue. If you have losses in excess of your cash investment, and your share of debt on the K-1 part K is on the “nonrecourse” line, you are likely to have an at-risk problem. You will have to go to IRS Form 6198 to figure out whether you have to defer losses under the at-risk rules.

The “passive loss rules” are the final hurdle for deducting K-1 losses. These rules were enacted in 1986 to shut down that era’s tax shelters. If you have “passive” losses in excess of “passive” income, you have to defer the losses until you have passive income in a future year, or until you dispose of the “passive activity” in a taxable transaction.

A loss is “passive” if you don’t “materially participate” in the business. There are a number of tests that you can use to determine whether you materially participate, but the most common is working at least 500 hours in the business in a year. 

Real estate rental is passive by law, unless you are a “qualifying real property professional.”  Special rules keep you from generating “passive” income to allow you to deduct passive losses. For example, land rent and most investment income is not considered “passive” under these rules. The passive loss limitation is computed on Form 8582.

These rules are complicated, even for tax pros. If you aren’t sure where you stand, and the losses are significant to you, get in touch with a tax pro.

A version of this item previously appeared at


Tax Court: pledge of stock of one S corporation doesn’t create “at-risk” basis for related S corporation

Wednesday, September 7th, 2011 by Joe Kristan

If you want to deduct losses from your S corporation, you need to clear three hurdles:
– You have to have basis in your S corporation stock or debt from a personal loan to the S corporation;
– The basis has to be “at-risk”; and
– You have to not run afoul of the “passive loss” rules.
A Michigan couple tripped over the first two tests in Tax Court last week, leaving them with a $16 million deficiency. We talked about the basis problems yesterday, so let’s hit the “at-risk” problem.
The taxpayers borrowed money to fund “Alpine,” a money-losing S corporation. They pledged the stock of another S corporation, “RFB,” as security on the loan.
Congress enacted the “at-risk” rules in the Ford administration to shut down that era’s tax shelters. Taxpayers would enter equipment leasing partnerships financed with debt secured by the equipment. If the loan went unpaid, the lender could repossess the equipment, but the partners weren’t personally on the hook. The at-risk rules fought this by saying a pledge of other property “used in the business” does not by itself create at-risk basis. A pledge of personal property not used in the business, in contrast, does make you “at-risk.” While Congress wasn’t willing to let equipment lessors cross-collateralize their lease property to get at-risk basis, it was willing to let taxpayers deduct losses if they put their personal assets on the line.
The Tax Court held that in this case the RFB stock was “property used in the business” because it had business ties to Alpine (citations omitted):

Pledged property must be “unrelated to the business” if it is to be included in the taxpayer’s at-risk amount. The Alpine entities were formed by petitioner to expand RFB’s existing cellular networks. RFB also used some of Alpine’s digital licenses to provide digital service to RFB’s analog network areas. RFB then allocated income from the licenses back to Alpine. The RFB stock is related to the Alpine entities.

The Tax Court held that even if the RFB stock were unrelated, the taxpayers were not really on the hook for the loans in any case.
The at-risk rules are obscure and often overlooked. That can be dangerous. You don’t have to have a business set up as a tax shelter to run into these rules. Any time you have financing where you are not personally on the hook for a loan, except in third-party real estate financing, these rules can bite. Even if you personally liable for a loan, the at-risk rules can still apply if the loan is from a related party, especially a party connected with the business.
Cite: Broz, 137 T.C. No. 5
Brother-sister S corporations can be bad basis news


Farm Buildings and 100% bonus depreciation

Friday, August 12th, 2011 by Joe Kristan

Paul Neiffer summarizes:

If a farmer is constructing a new building and the construction commenced after September 8, 2010 and is finished before January 1, 2012, then the total cost is allowed to be 100% depreciated during 2011. If the building construction commenced before September 9, 2010 and was finished in 2011, then only 50% bonus depreciation is allowed (unless you can segregate out some components that can be 100% bonus depreciated this year).

This only applies to farm buildings. Non-farm residential or commercial real estate is not eligible for bonus depreciation, with a very limited exception for some restaurant buildings. If the bonus depreciation generates a loss, the usual rules limiting losses may apply — basis limitations, at-risk rules, and the passive activity loss rules.