The program allows you to have up to three separate activities on a single K-1. Each of these activities has its own designation as passive or not, its own Section 179 expense allocable to it, and its own Section 1231 amount allocable to it.
The first activity is an ordinary income activity (line 1). The second activity is rental real estate (line 2). The third activity is other rental (line 3).
For ordinary income activities and rental real estate activities, make sure to check the appropriate box to tell us about the passive/non-passive nature of your interest in the activity.
For each activity, you may also enter any carryforward loss for the activity, and carryforward loss for the activity for purposes of the Alternative Minimum Tax.
Also, for each activity, you can indicate whether you totally disposed of the activity this year in a taxable transaction to an unrelated party. (If you have any question as to whether the buyer was "related," or any other question about your total disposition, consult IRS Publication 925, Passive Activity and At Risk Rules.)
If you did totally dispose of this activity, enter the gain or loss on the disposition. Also enter the gain or loss for purposes of the Alternative Minimum Tax.
Important Note: If you sold or otherwise disposed of your shares in this partnership or S. Corp. you should enter the data on this transaction on Schedule D and then manually carry it back to this line on the K-1. If you are subject to the Alternative Minimum Tax, figure your AMT gain or loss on the worksheet at the bottom of the Schedule D.
All amounts for lines that could be passive are carried from the body of Schedule K-1 to the Allocations worksheet, lower down on the K-1. (These lines are listed on the Allocations worksheet itself.)
If the partnership was dissolved in 2010, please consult a professional advisor for advice about the tax treatment of the dissolution. To find out how you can talk to an H&R Block tax professional, click the Ask a Tax Advisor button.
Most likely, your Section 1231 amount refers to only one activity. In this case, be sure to enter the Section 1231 amount in the row that corresponds to your activity entry above (line 1, 2, or 3).
For each item you enter on this line, you should enter, at the left of each line, the number of an activity (1, 2, or 3) that identifies the activity with which the item belongs. These entries will be used if the activity is passive, to allocate losses to the activity.
Be sure to enter losses as negative amounts on these lines.
Most likely, your Section 179 amount refers to only one activity. In this case, be sure to enter the Section 179 amount in the row that corresponds to your activity entry above (line 1, 2, or 3).
Section 179. We limit this entry to $105,000. It is up to you to make sure that the total of all Section 179 entries you make throughout the program is not more than $105,000.
Self-employment income. The number in this box should NOT have the Section 179 amount subtracted. If you are a general partner of a partnership, we'll subtract the Section 179 amount for you when it carries this number to Schedule SE. If your K-1 reports self-employment income minus Section 179 in line 15a, then you should add back the Section 179 amount before making your entry in the program.
We give you the choice of reporting your taxes paid to a foreign government as a direct credit on Form 1040, a deduction on Schedule A, or as amounts toward the calculation of the Foreign Tax Credit on Form 1116. If you select Form 1116, the amounts will carry to the third column of the copy of Form 1116 that you specify.
Each line contains the income and loss items entered on line 1 , 2, or 3, respectively, at the top of K-1, and the following items:
The Section 179 expense for each activity;
The Section 1231 income or loss for each activity;
The "other income" amounts for the activity from line 11 through line 11.
This chart contains totals from all items that could be passive activity items (if they are not passive, then we just carry the totals from the body of Schedule K-1 unchanged).
It also calculates the allocations of passive activity losses among the various items that went into the net income or loss for each activity.
We perform the allocations using the formula in the IRS's Form 8582, Worksheet #6. Here is how they work:
We figure the "total loss" for each of the three activities, including carryforward loss. (This is not "total loss" in the usual sense. Read on.) To figure total loss, we add together all the negative line items and ignore all the positive line items. We do this because we are just trying to figure out how to allocate the loss line items. For this purpose, we treat the net income (line 1, 2, or 3) and the carryforward loss as a single line item. Which "line items" are included? All the ones that were part of the passive activity calculation.
Special case: If the activity is nonpassive this year and there was not a complete disposition, but there was a carryforward loss, we do NOT treat this carryforward loss as part of the total loss. The carryforward loss in this case simply carries forward until the activity again becomes passive, or until the activity is disposed of.
Next, we figure the amount to enter in each box on the Allocations worksheet. For many cases, this is easy. We can enter the full amount of each line item in all of the following cases:
All line items showing income (bearing in mind that current income and carryforward loss are combined as a single line item);
All line items for nonpassive activities;
All line items for passive activities that were totally disposed of in a taxable disposition to an unrelated party in 2010.
All line items for passive activities where the activity itself had an overall gain (the gains on the gain lines were more than the losses on the loss lines).
But for items for an activity that had a passive loss and that was not totally disposed of, it's a bit trickier. In this case, we use the following formula:
Amount to Enter = Net Loss - ((Net Loss/Total Loss) * Unallowed loss).
This is the formula used on the IRS's Worksheet #6 to allocate losses among different tax forms. What is happening here? Let's break this formula into its component parts and see:
"(Net Loss/Total Loss)" is the percent of total loss that is allocable to this line.
"(Net Loss/Total Loss) * Unallowed loss" is then the amount of unallowed loss allocable to this line. We are multiplying the percentage by the total unallowed loss. This gives us the unallowed loss for this line.
"Net Loss - ((Net Loss/Total Loss) * Unallowed loss)." is then the total loss minus the unallowed loss, which yields the allowed loss. That, then, is the amount to enter on the line.
The unallowed loss amount comes from column (5) of the passive activity worksheet on the K-1.
Next, we total the amounts in the boxes across, and put the total in the right-hand column. This is the amount that carries to the given tax form.
We treat nonpassive activities differently from the way we treat passive activities, for purposes of the alternative minimum tax.
For non-passive activities, the items on lines 16a, 16c, and 17, and excess IDC's are carried to Form 6251 as described in the description of calculations for that form.
For passive activities, the items on lines 16a, 16c , and 17, and excess intangible drilling costs ("IDC's") (see below) are totaled, then added to income in one of the three rows of the AMT passive activity worksheet. You indicate which row in the entry below line 19.
We calculate the AMT adjustment for passive excess IDC's in two steps, as follows:
Net Income Oil and Gas = Gross Income Oil and Gas - (Deductions, Oil and Gas - Excess IDC, Oil and Gas).
AMT Adjustment = Excess IDC, Oil and Gas - (65% * Net Income Oil and Gas).
We limit this amount to be greater than or equal to zero. Then we continue by calculating excess IDC Geothermal the same way.
And again, we check that this second amount is not less than zero.
Note: For AMT purposes, we calculate the excess IDC's on an activity-by-activity basis. An alternative would be to compute them on a tax-return-wide basis. This is an arcane calculation, and we do not see any firm tax authority for either approach. The approach we have chosen is computationally more direct. If you have any significant amount of excess IDC's, you may wish to consult a professional tax adviser. You can tell your adviser that our calculation has assumed that the Section 469 rules trump the apparent dictate of Section 57 with respect to aggregating IDC's. To find out how you can talk to an H&R Block tax professional, click the Ask a Tax Advisor button.
Except for these items, the AMT entries on the AMT passive activity worksheet are the same as the entries on the regular passive activity worksheet.
We perform a separate, parallel, calculation of allowable passive activity losses for AMT purposes. It carries the difference between this year's regular versus passive income or loss to Form 6251, line 19.
Note that for passive activities, the items at line 17 and following will NOT carry to the lines on Form 6251 that are indicated on the face of the K-1 form; they will ultimately be reflected on line 19 of Form 6251 instead.
The "prior year unallowed loss" for the AMT passive activity worksheet carries from that entry on lines 1, and 2 at the top of Schedule K-1.