Parntership follow up question....

[AZ-Tax]

My client is positive his $20,000 investment as a partner in this partnership will be deductible from his AGI. His K-1....Part 3 section 14 of the K-1 is titled "self employed earning (loss)" for which code A displays approx ($20K) and code C displays roughly $700.

Is it possible for a taxpayer who earns a full time W-2 wage completely unrelated to the partnership business and the partnership is a couple thousands miles away, be able to take a self employed loss on his front page of his 1040 for most or all of the entire amount invested?

[JoshinNC]

Just had one of these on Friday

My client is positive his $20,000 investment as a partner in this partnership will be deductible from his AGI. His K-1....Part 3 section 14 of the K-1 is titled "self employed earning (loss)" for which code A displays approx ($20K) and code C displays roughly $700.

Is it possible for a taxpayer who earns a full time W-2 wage completely unrelated to the partnership business and the partnership is a couple thousands miles away, be able to take a self employed loss on his front page of his 1040 for most or all of the entire amount invested?

Client invested in an oil and gas partnership based in PA, with operations in WV and NY. He is an NC resident. Box 1 showed income of $1500 +/- and SE loss of $48,000 on his $50,000 investment. His K-1 had him listed as a General Partner although he had no involvement at all and only owned less than 2% of the total partnership. My software did not allow him to deduct the SE loss against his W-2. I looked through TTB and couldn't find any info to substantiate him taking the loss against his W-2. I hope I was right, and I think you are also. Maybe someone else will chime in and correct us both if needed.

[AZ-Tax]

JoshinNC are your referring to the K-1 boxes...

JOSHinNC said: Client invested in an oil and gas partnership based in PA, with operations in WV and NY. He is an NC resident. Box 1 showed income of $1500 +/- and SE loss of $48,000 on his $50,000 investment. His K-1 had him listed as a General Partner although he had no involvement at all and only owned less than 2% of the total partnership. My software did not allow him to deduct the SE loss against his W-2. I looked through TTB and couldn't find any info to substantiate him taking the loss against his W-2. I hope I was right, and I think you are also. Maybe someone else will chime in and correct us both if needed.

JoshinNC, when you mention box 1 are you referring to box or line 10 of the K-1, part 3?
The $48K loss, was that in box or line 14 under A code of part 3?

[JoshinNC]

Here's the K-1 totals

Box 1 (ordinary income/loss): $1505

Box 14 (Code A): $-48495

I did not deduct the code A loss against his W-2 ($100,000+).

[BOB W]

Box 1 (ordinary income/loss): $1505

Box 14 (Code A): $-48495

I did not deduct the code A loss against his W-2 ($100,000+).

As I recall anything to do with Oil Wells is legislatively considered a "Working Interest" and is subject to SE tax.

Do some research on "OIL WELL WORKING INTEREST". there may be a loss allowed even if not involved.

check this out>>>>> http://www.taxalmanac.org/index.php/...t_in_oil_wells

[veritas]

See IRC 50.7(c) (2)

From Kleinrock's:

Any working interest in an oil and gas property that the taxpayer holds directly or through an entity that does not limit the taxpayer's liability with respect to such interest is not a passive activity. 45 Thus, an owner of a working interest in oil and gas property would be able to deduct otherwise allowable losses attributable to the working interest regardless of his level of participation in the activity.

Also page 7-10 in TTB.

[AZ-Tax]

Josh

Is it because your software restricted you from deducting the code A loss or did you manually not deduct it?

[David1980]

Well, if you were to manually do this where would you make the deduction?

Example:
1 W-2 with $100,000 income.
1 K-1 with amount in box 14a loss of $20,000.

Seems to me the $20,000 will go to Schedule SE which results with -20,000 on the SE. However, with no other income on the schedule SE there's no tax benefit. Unless I'm missing something.

[JoshinNC]

See David's repsonse below

Is it because your software restricted you from deducting the code A loss or did you manually not deduct it?

The software had nowhere to put the negative SE income because there was no SE form produced. Therefore, there is no SE tax to take the deduction against. I have come to the conclusion that the advisor's who sold your client and mine this investment were giving inaccurate tax advice (go figure) as a result of their failure to understand the difference between a deduction for SE purposes and a deduction for income tax purposes. I would recommend printing the pdf from Atlas that I linked in a previous post and including it in the client's copy of the return. If he/she asks why it was not deductible give a quick 2-3 minute explanation of the difference between SE tax and income tax, and reference the document you included in his copies.

[AZ-Tax]

SE (form 1040)

Josh and David, within my ProSeries, I searched for form Sch SE and when it appeared, my clients K-1, box 14, code A negative amt appears on Ln 2 of Sch SE just like the instuctions state on the "summary explanation" link Josh shared. Though the Sch SE schedule will not stick, Ln 12, pg 1 form 1040 is still blank and Ln 17 still has a 3 digit amt opposed to my clients 5 digit investment. This is really odd.

[AZ-Tax]

Just thought of something

My client has been filing a partnership return the last 2 yrs for he has an LLC with his spouse but in 2007 taxpayer/spouse can file Sch C instead of a partnership. If the taxpayer has any net profit on Sch C, the Atlas box 14, code A will help reduce the SE tax on that net profit. I did a sample Sch C with $50K of net profit and a Sch SE generated $141 in SE tax on $50K of net profit.

Am I on the right track here?

[JoshinNC]

Can't elect out of partnership treatment

My client has been filing a partnership return the last 2 yrs for he has an LLC with his spouse but in 2007 taxpayer/spouse can file Sch C instead of a partnership. If the taxpayer has any net profit on Sch C, the Atlas box 14, code A will help reduce the SE tax on that net profit. I did a sample Sch C with $50K of net profit and a Sch SE generated $141 in SE tax on $50K of net profit.

Am I on the right track here?

on a joint venture that is an LLC. Must be a "qualifying" joint venture, and an LLC does not meet the definition. At least that is my understanding. But, yes you are otherwise on the right track.

[AZ-Tax]

Pg 5-7 TTB...Top right Sch C or Partnership

New Law: Beginning in 2007, a qualified joint venture whose only members are a husband and wife may elect NOT to be treated as a partnership for federal tax purpose.

I guess my question remains the same, can a qualified joint venture as above convert to a Sch C in 2007 if they filed Partnership the last 3 years?

[David1980]

I think you got the idea right on the SE tax deduction.

Another example, 50,000 on schedule C with a K-1 that has 14a of -50,000. The net result on schedule SE would be $0 SE income so no SE tax would be due. However, this is of little help when your taxpayer has no SE taxable income and is W-2 only.

[JoshinNC]

In earlier posts the definition of qualified joint venture was discussed

New Law: Beginning in 2007, a qualified joint venture whose only members are a husband and wife may elect NOT to be treated as a partnership for federal tax purpose.

I guess my question remains the same, can a qualified joint venture as above convert to a Sch C in 2007 if they filed Partnership the last 3 years?

A venture that is registered as an LLC under the resident state's laws does not qualify as a joint venture and is not able to elect out of partnership treatment except to be taxed as a corp (but not 2 Sch. C's).