K-1 partner losses

[pookiemaw]

t/P has K-1, Company is LP, Ltd partner is checked. He works for the company . His p/l share is 11.75%. He has a $141,434 loss for 2011. I am not questioning the limitations. I am questioning the fact that does he get to take the loss. What qualifies him to take the loss? Does beginning and ending capital account come into play? I have been reading about the hours participation needed, etc. If he materially participates does that mean in the management area. But member-manager is not checked. Would that qualify him if it was. He is Just want to be sure. He receives a w-2 from the company.

[erchess]

I don't really understand partnership basis beyond the fact that there is an inside and an outside basis and for some purposes you want one and for others the other. I use a worksheet in my Drake software to track basis and I understand that on a monkey see monkey do level. I feel like someone who knows more can answer that part of your question and will do so.

So far as active participation goes I don't think it matters what he did if he put in the requisite number of hours and/or got a big enough chunk of his income from doing so. I think if the member manager box were checked then he would have sufficient active participation.

[BHoffman]

Hi Pookie,

http://www.irs.gov/instructions/i1065sk1/ch01.html#d0e156

See the section "Limitations on Losses, Deductions, and Credit. There is a worksheet. Hope this helps.

[DaveinTexas]

You mentioned your TP is a

t/P has K-1, Company is LP, Ltd partner is checked. He works for the company . His p/l share is 11.75%. He has a $141,434 loss for 2011. I am not questioning the limitations. I am questioning the fact that does he get to take the loss. What qualifies him to take the loss? Does beginning and ending capital account come into play? I have been reading about the hours participation needed, etc. If he materially participates does that mean in the management area. But member-manager is not checked. Would that qualify him if it was. He is Just want to be sure. He receives a w-2 from the company.

limited partner in a LP. The member manager terminology is commonly something you would see on an LLC 1065 K-1. Apparently, of all the research I have done on this subject, it is possible for a limited partner to deduct losses (subject to at risk rules and basis limitations) if the limited partner materially participated in the activity. Of the 7 rules to qualify as materially participating (SEE ATTACHED FLOW CHART FROM TAX TOOLS) the limited partner must fall under one of these 3 rules in the chart:

The individual participated in the activity for more than 500 hours during the tax year;
The individual materially participated in the activity for any five taxable years (whether or not consecutive) during the previous 10 tax years; or
The activity is a “personal service activity,” and the individual materially participated in the activity for any three previous taxable years (whether or not consecutive).

Verbiage from Publication 925 also states: "Limited partners. If you owned an activity as a limited partner, you generally are not treated as materially participating in the activity. However, you are treated as materially participating in the activity if you met test (1), (5), or (6) under Material participation tests , discussed earlier, for the tax year"

Smaller hoops to jump through but if the TP works for the company he is a partner of, he very well may have participated over 500 hours during the tax year. The participation must have been related to the activity within the partnership; which I assume that would be the case.

Please review rules regarding my post; the flow chart, IRC 469 and this article: http://www.journalofaccountancy.com/...p/20103005.htm

I hate limited partnerships and LLCs for this very reason; the uncertainty of the nature of the losses. Also, to do your due diligence, find a reliable (and pay for) tax research group to research your question. The ramifications of an incorrect answer would be devastating; not to be doom and gloom (just cover your rear!)

Also, your basis question. I have used the capital accounts to figure the basis when no other information was handy/available. Another handy tool to figure basis would be previous years K-1s if available or the partnership returns from previous years. But, be careful when applying items to at risk basis such as non recourse loans to a limited partner's basis. Typically a partner is not considered at risk for a non-recourse loan.

I hope that helps; please don't take our word for it. Do the research, do your due diligence and then charge your client for your work. Next time you can charge your client for the same advice (even though you may already know the answer without doing the research!) Also, please know that I am no partnership guru; it makes me uncomfortable answering these questions but I fear others may feel the same way so I will stick out my neck. I have read A LOT on this particular subject and it is still never clear to me. This is a very complex part of the law and it is not easily digestible, at least to me anyway.

Good luck and try to take a break between doing hours of research on this muddy subject (as I know you will