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DH's family owned and ran a small motel as an LLC. It was sold in 2019. DH just received a Form 1065 K-1 which listed 3 items in Part III. I entered these into H & R Block software to amend our 2019 Form 1040 and generate a Form 1040X.

Box 1: an operating loss which was reported on Schedule E in the section for partnerships.
Box 10: a Net section 1231 gain which was reported on Schedule D as a long-term gain.
So far, so good.

Now to my question:

Box 13 (V): Other deductions, a large loss described in "IRC Sec. 163(J) adjusted taxable income calculation" as a "Pass-through loss and deduction item." Although I entered it into the software in the right box with the right letter it did not appear on Schedule E or anywhere else on the 1040X.

Should this pass-through loss be on the 1040X and if so, on which Schedule? It is larger than our income and would leave us with a negative income for 2019.

Wendy
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No. of Recommendations: 4
You are missing key information. In addition to the 13V entry, the LLC should have provided additional information in 20AH and supplemental statements. The various components that make up the 13V entry are adjustments to the cost basis of various assets which were sold when the LLC was sold. Without knowing the specifics, I would expect they might affect entries on Form 4797 or Form 8949/Schedule D.

Ira
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The K-1 does not include a section 20AH. It does include a section "IRC Sec. 163(J) adjusted taxable income calculation" which includes:
Taxable income
Business Interest Expense Not from a Pass-through
Depreciation, Amortization and Depletion Deduction
Pass-through Loss and Deduction Items (Box 13(V))

The total of these 4 items is labeled "Adjusted Taxable Income" but this number is NOT the same as the "Ordinary business income (loss)" in Box 1. It is not shown anywhere on Page 1 of the K-1.

I'm puzzled since I would expect that "Adjusted Taxable Income" would have to be reported but, if so, I don't know how so I didn't report it.

The K-1 contains an Item L - Reconciliation which does not show the number in Box 13(V).

Please help me phrase a question to the tax preparer.
Bottom line: Could any of the Pass-through Loss and Deduction Items potentially be added to 1040X or would none of them qualify in any case?

Thank you,
Wendy
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No. of Recommendations: 3
The K-1 does not include a section 20AH. It does include a section "IRC Sec. 163(J) adjusted taxable income calculation" which includes:
Taxable income
Business Interest Expense Not from a Pass-through
Depreciation, Amortization and Depletion Deduction
Pass-through Loss and Deduction Items (Box 13(V))

The total of these 4 items is labeled "Adjusted Taxable Income" but this number is NOT the same as the "Ordinary business income (loss)" in Box 1. It is not shown anywhere on Page 1 of the K-1.

I'm puzzled since I would expect that "Adjusted Taxable Income" would have to be reported but, if so, I don't know how so I didn't report it.

The K-1 contains an Item L - Reconciliation which does not show the number in Box 13(V).

Please help me phrase a question to the tax preparer.
Bottom line: Could any of the Pass-through Loss and Deduction Items potentially be added to 1040X or would none of them qualify in any case?

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The "Adjusted Taxable Income" number shown is NOT an additional income amount to simply add to your Schedule E. It is the taxable income -SPECIFICALLY FOR THE PURPOSE OF SECTION 163(J)- to determine if there is a limitation on the business interest that can be deducted. Sometimes that number COULD be the same as the ordinary business income, but more likely not, as a number of adjustments are potentially applicable. In this case the subtotal of incomes listed should probably include the 1231 gain.

An additional question I have - did your tax software produce a Form 8990 for your amended return? Very possibly not. And it may not have if you didn't enter the numbers that total to the Adjusted Taxable Income number. But my suspicion is that possibly that number will go nowhere. Or it may give you an additional interest number, to go to Schedule E, via Form 8990.

A business is not subject to this limitation if its average gross receipts for the prior 3 years is less than $26 million. I'm guessing your motel business isn't that large. But the LLC still has to report the information to you, as the limitation is applied at the owner level.

So you need to ask the preparer:
if the business even had any deductible interest expense;
if it would have been subject to any limitation on its own;
if any applicable interest has been deducted in the "net business income/loss"
if these numbers will require you to have a Form 8990 on your return;

and hopefully this will prompt the preparer to give you a more complete explanation of the situation.

Not knowing all the details of the business I can't come up with every possible applicable question. But these points should help him/her realize what you're trying to understand, and generate a more complete and relevant response.

To clarify: I've never done a return with this 163(j) limit. I retired 5 years ago, and this set of rules came in with the 2017 tax cut act. But I have tried to keep up with current developments, through continuing education to keep my CPA license active.

Bill
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One additional non-tax consideration: With what COVID-19 has done to the travel industry this year, 2019 was a good year to sell a motel. Count your blessings.

Bill
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The K-1 says, "The entity is a small business and is exempt from the IRC Sec. 163(J) business interest expense limitation."

The K-1 does not have a Box 20 Code AH.

My specific question is:
What should I do with the Box 13 Code V "Other deductions"? This is a large amount. It is listed as a "Pass-through loss and deduction item" in the calculation of IRC Sec. 163(J) Adjustable Income Calculation.

Can I enter the Box 13 Code V number on Schedule D of our Form 1040X as a long-term capital loss?
Wendy
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No. of Recommendations: 4
The K-1 says, "The entity is a small business and is exempt from the IRC Sec. 163(J) business interest expense limitation."

The K-1 does not have a Box 20 Code AH.

My specific question is:
What should I do with the Box 13 Code V "Other deductions"? This is a large amount. It is listed as a "Pass-through loss and deduction item" in the calculation of IRC Sec. 163(J) Adjustable Income Calculation.

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You really have to get a better explanation from the tax preparer as to what that number really represents. The number may go nowhere; it may be only supplementary information, to be used in the case that you, personally, were subject to the 163(j) limitation, in which case this could be an additional item for your 1040.
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Can I enter the Box 13 Code V number on Schedule D of our Form 1040X as a long-term capital loss?
Wendy

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Not without better information that it really is a capital loss at the LLC/partnership level, or somehow relates to the dissolution of the LLC. Has that happened? Was this a final return? If so, you may have a gain or loss from that event.

Bill
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