For preparers who report Schedule K-1 items on individual returns — the outside basis, at-risk, and passive loss limitations the K-1 does not compute, and the §199A qualified business income deduction the owner must calculate.
The K-1 reports what the entity did. Whether the owner can use those items on the individual return is a separate owner-level analysis the K-1 does not answer. Outside basis under IRC §705 (partnerships) or §1367 (S corporations) limits how much loss the owner can deduct. The at-risk rules under §465 limit the deduction further to amounts the owner has actually placed at economic risk. The passive activity loss rules under §469 limit passive losses to passive income. The excess business loss limitation under §461(l) caps aggregate business losses on the individual return regardless of what the K-1 reports. And the §199A qualified business income deduction has to be computed at the owner level, using entity information the K-1 provides in specific boxes and applying aggregation, wage-and-UBIA, and SSTB rules the entity did not compute for the owner.
This course covers each owner-level analysis in the order the K-1 items pass through it. Coverage includes outside basis computation for partnership interests and S corporation stock and debt, the at-risk limitation under §465 and the calculation of amounts at risk, the §469 passive activity loss limitation as applied to K-1 items, the §461(l) excess business loss limitation, and the §199A qualified business income deduction with its aggregation election, wage and UBIA of qualified property limitations, and specified service trade or business restrictions.
The course closes with the workpapers and computations a preparer maintains to support K-1 item treatment on the individual return, including basis rollforwards, at-risk schedules, and §199A worksheets. Three hours of Federal Tax credit.
By the end of this course, participants will be able to:
Why the K-1 does not answer the deductibility question, the sequence of limitations that apply to K-1 losses, and the workpaper architecture that tracks the analysis.
Initial basis, adjustments for contributions and distributions, allocations of income and loss, and the effect of partnership liabilities on outside basis.
Stock basis and debt basis separately, ordering rules for basis reductions, and restoration of debt basis in subsequent years.
Amounts at risk, nonrecourse financing exceptions, qualified nonrecourse financing for real estate, and the annual at-risk recomputation.
Application of §469 to trade or business activities reported on K-1, distinguishing material participation from passive treatment at the owner level, and interaction with the outside basis and at-risk limitations.
The aggregate business loss cap for the current year, computation of the excess business loss, and treatment of the excess as a net operating loss carryforward.
Owner-level computation of the §199A deduction, the aggregation election, wage-and-UBIA limitations, SSTB restrictions, and the §199A worksheet a preparer maintains from the K-1 information provided.
Jennifer Harris Smith, JD, CPA. Attorney (Texas). CPA (Texas). Member of Texas Bar College. Full bio →