For traders that have a K-1 business with ordinary losses and capital gain income every year, can we enter a Form 461 adj. Line 8 to override the excess business losses?

[Hutchcpa]

Proprietary traders have ordinary business expenses like salaries and overhead that get declared as K-1 line one losses every year.  And, the gains are capital gains, some long-term, some short-term and some are straddle gains.

Form 461 generally limits the losses to $250,000 and carries the rest over to the next year, subject to losses in the next year.

This doesn't make sense since it will be ordinary losses every year.

can we adjust Form 461, line 8 for the capital gains to allow the losses?

[PhoebeRoberts]

I don't believe so. A good return to extend.

[itonewbie · Accepted solution]

To me, the short answer is no also.

You mentioned that your client is a prop trader.  My presumption is that he has carried interest, other cap gains/losses, as well as ordinary business losses flowing through the K-1?  If that is the case and assuming your client doesn't have any other business income, the EBL being limited to $250k ($500k for MFJ) is exactly the intention of the new §461(l).  What is your basis for making an adjustment on F.461 and what do you intend to re-classify as gross income from trades or businesses?

One thing to note is that the Congress intended for wages to not be considered gross income from a trade or business for purposes of §461(l), similar to the tax treatment under other code sections such as §199A, but it was not written into §461 and a technical correction has yet to be made.

The limited information you have provided does not seem to imply that this involves §475(f) election.  If there is one in effect, gains and losses subject to §475(f) would then be MTM and treated as ordinary gain.  Capital loss limitation would then not apply on the net loss, SE tax would need to be paid on the net income (after deductions for business expenses presumably on Sch C), and such gains may then be considered business income (that could offset business expenses flowing through the K-1).

[taxprep5268]

Could you tell me specifically what form in Proseries specifically allows you to election Section 475 (f) status?  I understand this election needs to be made on a timely filed return, but I don't see a form to use in Proseries.. could you help?

Jeff