This week’s tax question:
I’ve been an early employee at various startups. From one past venture, I received a Schedule K-1 (form 1065) with box D checked and a loss in box 1 and box 10. What forms do I have to fill out, and should I take the loss in 2010 or carry it forward?
We passed the question on to Mike Scholz, CPA and tax director at Wegner CPAs & Consultants. Here’s his answer:
When box D is checked on your partnership Schedule k-1, this indicates that this investment is a Publicly Traded Partnership (PTP). PTPs are generally treated as passive investments. If you are no longer employed by the PTP, the loss reported on Line 1 and box 10 will be passive, so it will be suspended and the losses will be carried forward to future years when this PTP shows income. Special rules for PTP provide that PTP losses may be used only to offset income or gain from passive activities of the same PTP.
If you are still employed by the PTP, then the regular material participation rules and certain at-risk basis limitation rules would have to be met in order to deduct the current year loss from this activity. Any time Schedule K-1s are included as part of your 1040 tax return, especially if it is a PTP, special attention to the tax rules is advised and you may require the assistance of a tax professional.
The tax forms that would be prepared for the current year is Schedule E (i.e., Part II). The PTP name and EIN is reported but no loss would be reported. Unlike other passive investments that are normally reported on Form 8582, PTP losses do not get reported on that form.
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