Partnership K-1 losses and gains

Alan Meyer · 2016-05-13T20:20:04+00:00

I'm looking for some advice on a method of dealing with a K-1 partnership reported tax loss. Right now, I have a K-1 showing a substantial passive loss that I cannot deduct from my taxes because I have no offsetting K-1 gain. However my wife has a business that she is now running as a sole proprietorship. I'm wondering if would be practical and legal for us to convert her business to a general partnership with she and I as the partners, then distribute some of the gains on K-1 forms to each of us. We could then carry over our K-1 losses and, next year, use the K-1 gains from our new partnership to offset the losses, thus gaining some tax savings. From what I can tell, a general partnership, as opposed to a limited liability partnership or any kind of corporation, is simple to set up even without a lawyer, imposes no special taxes or fees on us, and will fill the bill. Can anyone tell me if this is right or wrong? Are there difficulties or pitfalls I should be aware of? I'll add here that my wife and I met in 1962 and have been very happily married since 1968, so we're not worried about the kind of squabbles that I know some partnerships degenerate into. Thank you very much. Alan

May 13, 2016 25 Replies

Rate this thread:

ira smilovitz 10 years ago

Both positions are correct, but in different circumstances. In a family partnership where capital is a material income-producing factor you can have spouses as partners where one contributes capital and has passive income while the other provides services to the partnership and has nonpassive income. In a consulting practice, where services are the source of income, a spouse cannot receive passive income when the other spouse provides the services. (Note that there are special rules for family partnerships, a topic which hasn't been raised yet in this thread.)

Ira Smilovitz

Vote

Stuart Bronstein 10 years ago

Actually I think it means the opposite of that. Temporary Regulation

1.469-5T(f)(3) says,

"In the case of any person who is a married individual (within the meaning of section 7703) for the taxable year, any participation by such person's spouse in the activity during the taxable year (without regard to whether the spouse owns an interest in the activity and without regard to whether the spouses file a joint return for the taxable year) shall be treated, for purposes of applying section 469 and the regulations thereunder to such person, as participation by such person in the activity during the taxable year."

Sounds to me like that means if one spouse materially participates, the other spouse is treated as materially participating irrespective of what the other spouse actually does.

Vote

ira smilovitz 10 years ago

You and lotax are in agreement. Lotax's unfortunate use of a double negative can be confusing. "...[C]an't not..." implies "is".

Ira Smilovitz

Vote

Barry Margolin 10 years ago

I think that's what he said. Maybe you didn't notice the double negative "can't not be a material participant".

Vote

lotax 10 years ago

Thank you, Ira.

LoTax

Vote

lotax 10 years ago

And Barry.

Vote

Join the Discussion

Have something to add? Share your thoughts — no account required.

Didn't find your answer?

Ask the community — no account required