fried on CA passive loss calculations-x posted

[joanmcq]

I'm working on an RE professional return and am just blank looking at the CA passive loss adjustment on Sch CA. (For those of you in other states, CA doesn't follow federal in allowing RE pro for rentals; only the $25k active participation is allowed).

Since this was a DIY since 2006, to satisfy myself that everything is kosher, I've been recalculating all this guy's carryforwards; NOL, AMT NOL, CA NOL and the Fed/CA passive loss adjustments-especially since none of the CA carryforwards from his prior year's returns are correct. When the rentals only had losses, it was fairly straightforward, but for 2010 he has a ton of income on one rental, and smaller losses on the others. From earlier years he has over $100k of CA passive losses. On the federal return, the rentals net to a $10k loss.

So I've worked through the detail tab on Form 3801, and ATX is carrying over from the federal no losses on any of the properties. all of the worksheets show zero for federal---well for federal they aren't passive. And the program brings to the Sch CA $25000 to the subtraction column. Since for federal, he is still getting to take a 10K loss, shouldn't the adjustment only be an additional $15k?

For the earlier years, I worked out the loss allocations using a spreadsheet. Because one rental has income, my spreadsheet isn't working properly. I've been working on these calculations on and off for weeks now, and I am so close to getting the 2011 return done.

Oh, and just to complicate the calcs, he has a nonpassive S-corp loss too.

[Corduroy Frog]

No one comments

So no one has commented on this, I'll be brave and post.

Not that I have anything worthwhile to say. And not that Joan has really asked a specific question either. Might be why no one has responded, in addition to the fact that this situation is difficult to wrap your arms around.

I have the gist of the situation in my head, although not knowing California taxes. Sounds like a matter of simply recalculating six years worth of differences in Federal versus California allowable losses, and the difference in basis that results from same. I do think there are limits to ANY software, especially on state returns, and sometimes you are faced with the grisly task of hand-calculations. For the most part, I think Joan's task is do-able, with caveats as follows:

1) Each year is going to have to calculated separately, with dependency on the previous year. You can't just accumulate 5 years worth of stats and miraculously jump to 2011.
2) All reportable properties must carry their passive losses forward ratably to each year. I assume California insists on this happening as well. In years which show a profit, this may release pent-up passive losses for Federal and not for California, or vice-versa.
3) The scariest part of Joan's problem is she told us this was a DIY from 2006 thru 2010. This means there is virtually zero chance these calculations were properly reported prior to Joan's involvement. SOOOO, here is a question for the rest of you:
Does she proceed into 2011 with her own calculations as to what is proper for accumulated losses or is she doomed to proceed into 2011 based on how the DIY did in previous years?

My answer would be that I would do the work from 2006 forward based on what would have been proper, report 2011 in that fashion, and offer to amend this DIY guy for all years improperly reported. This could be a question for an ethics exam. What say ye?

I've followed joanmcq for some time and for the most part consider her to possess expertise superior to my own. She's got a mess on her hands. Sorry Joan-- I don't know whether this helps anything.

[joanmcq]

Thanks, CF!

You do mention ALL of the things I've been dealing with, and I did do the calculations from 2005 onward (the prior preparer didn't do the passive loss correctly in 2005, but calculated a non-existent CA NOL). I have a copy of the 2004 return as well, and am satisfied that any prior NOLs, C/Fs etc were used up before 2005. He wasn't a RE pro before that either-had been working outside and stopped to invest in RE. I've also examined his records for the last two years and am satisfied his bookkeeping is good, it's just his TurboTax that was crappy. And with the issues he had, he actually did a not bad job. There's just a limit to what TT will do, and it doesn't do Federal NOL calculations, and doesn't even include the forms for CA NOLs. Oh and I didn't even mention the CA AMT NOL calculations! Those were all done by hand. Luckily only one year had a CA NOL because of the differing treatment of CA & federal passive losses.

There's been no federal taxable income since then-accumulated NOLs & credits & capital losses all carried forward. And issue does exist with CA-he should have paid taxes in some of the years that are now closed.

But I did get through them, checked, rechecked, reworked, reviewed, and the **** thing is done with the exception of a missing K-1 from his husband. Did I mention it's a same sex couple????

I just treated myself to: Leonard Cohen's 'Hallelujah' and 'Closing Time', plus k.d. lang's version of 'Hallelujah'. Maximum volume.

And an N/A beer, and now an episode of Battlestar Galactica. Hallelu-----jah!

[veritas]

i would think 15k

Would be logical.

Have you called ATX?

[joanmcq]

Nah, didn't call ATX. I slept on it, reviewed everything with a fresh set of eyes, finished up most of the calcs, realized I had to do the CA AMT NOL (for which CA says, "prepare another 3508V using AMT numbers" and figured out a process, slept on it again, fresh review, rinse, repeat.

I tell you, it's been interesting just to see the software progression on the CA forms in the last 7 years! Although this return is truly a job for something like Prosystems fx. But I trust my tax knowledge if not always the software, and this is definitely a case of realizing what I know, what I need to research, and working through to find answers.

It's the most complicated return I've had so far that doesn't have a foreign corporation involved. And the 1040 for the foreign corp owner is actually easy-it was learning the 5471 that took months. I've had very few NOLs to deal with, this is my first RE pro (many think they are, but oh so few qualify!) And I've never, ever had a return in which they could be subject to CA AMT. I run a Schedule P anytime a client is close to Federal AMT, but since the trigger is usually state taxes which aren't deductible for CA, it's just not an issue.

What a feeling of satisfaction to get this completed!

[veritas]

So the adjustment on SCH CA

is ?

Sometimes the software is illogical and certain boxes must be checked or unchecked.

I had a recent instance where a farm asset (Land) was sold which qualified for a lower tax rate for Oregon.

I put all the salas and cost basis in and checked the box "Qualified Oregon Farm Asset". But the program computed the tax at the regular rate. I called Lacerte and after about 15 minutes of back and forth they told me I needed to enter (-1) in depreciation allowed.

For those that have not used Lacerte it is their illogical entry that equals none.

[joanmcq]

It was 15k.

With ATX, you still have to enter manually any fed/CA PAL differences; even though depreciation now flows to the state depreciation forms, the 3801 won't populate with any PAL adjustments without manually entering them into a detail screen, so it's not unlikely that only part of the adjustment went over to the Sch CA. Maybe in a future edition. One year on a survey the software conducted, I requested the link from the CA depreciation schedule to the 3885 (CA depreciation schedule) and voila! the next year it was there.

I have quite a few upgrades I'd like this year!