Can interest income on such a K-1 be absorbed by the prior passive losses that are being carried forward or must it be reported separately as ordinary interest income on Schedule "B" ?
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There is a reason there are separately stated items on a K-1; retaining character being one. Additionally, there are two types of income items that are treated as not derived from a passive activity; portfolio income and compensation for personal services (guaranteed payments as an example).
See 1.469-2T(c)(3).
As always, there may be an exception as noted in the regulations.
Based on the limited information, Schedule B.
Comment