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Common questions about Form 8582 in ProSeries

by Intuit•3• Updated 1 month ago

What is the purpose of the 8582:

Form 8582 is used by noncorporate taxpayers to figure the amount of any passive activity loss (PAL) for the current year. A passive activity loss occurs when total losses (including prior year unallowed losses) from all your passive activities exceed the total income from all your passive activities. Generally, passive activities include:

Trade or business activities in which you did not materially participate for the tax year.
Rental activities, regardless of your participation

PALs can't be used to offset income from nonpassive activities. However, a special allowance for rental real estate activities may allow some losses even if the losses exceed passive income. PALs not allowed in the current year are carried forward until they are allowed either against passive activity income, against the special allowance, if applicable, or when you sell or exchange your entire interest in the activity in a fully taxable transaction to an unrelated party.

For more Schedule C resources, check out our Tax topics page for Schedule C where you'll find answers to the most commonly asked questions.

Other information about passive activities - losses and credits

Per the IRS Topic No. 425 Passive Activities – Losses and Credits:

"Generally, losses from passive activities that exceed the income from passive activities are disallowed for the current year. You can carry forward disallowed passive losses to the next taxable year. A similar rule applies to credits from passive activities."

Material and Active Participation

Passive activities include trade or business activities in which you don't materially participate. You materially participate in an activity if you're involved in the operation of the activity on a regular, continuous, and substantial basis. In general, rental activities, including rental real estate activities, are also passive activities even if you do materially participate. However, rental real estate activities in which you materially participate aren't passive activities if you qualify as a real estate professional. Additionally, there's a limited exception for rental real estate activities in which you actively participate. The rules for active participation are different from those for material participation. You can find guidelines for determining material participation, the rules for determining who's a real estate professional and what's active participation, and the special rules that apply to the income and losses from a passive activity held through a publicly traded partnership (PTP) in Publication 925, Passive Activity and At-Risk Rules.

Disposition of Entire Interest

Generally, you may deduct in full any previously disallowed passive activity loss in the year you dispose of your entire interest in the activity.
In contrast, you may not claim unused passive activity credits merely because you disposed of your entire interest in the activity. However, you may elect to increase the basis of the credit property in an amount equal to the portion of the unused credit that previously reduced the basis of the credit property."

Viewing the 8582 calculations:

Open the client's tax return.
Press F6 to bring up Open Forms.
Type 8582 and press Enter to open the 8582 page 1.
No manual entries are allowed on the 8582 and any adjustments should be done on the original form, schedule, or worksheet.

To show active or material participation:

Each schedule or worksheet has checkboxes asking if the taxpayer or spouse materially participated in the business. This will change how the income/loss flows to the 8582. Rental schedules will also have an additional checkbox for active participation. This will also change how the income/loss flows to the 8582.

To change the status in ProSeries:

Schedule C: See checkbox G at the top of the Schedule C worksheet.
Schedule E Worksheet: See checkbox C, D and G at the top of the Schedule E worksheet.
Schedule F: See checkbox E at the top of the Schedule F.
Schedule K-1: Each of lines 1-3 will have their own checkboxes for material and active participation.

Showing the taxpayer or spouse is a real estate professional:

Open the client's tax return.
On the Federal Information Worksheet scroll down to Part X - Additional Federal Return Information.
Check the box under Real Estate Professionals.

Passive Losses from Publicly Traded Partnership (PTP) are Disallowed

Passive losses for Publicly Traded Partnerships are:

limited to income from the same PTP,
excluded from being taken against other types of passive losses,
suspended and will carry forward until the PTP has income to offset the loss.

If the partner's entire interest in the PTP is completely disposed of in a fully taxable disposition, any unused losses are allowed in full in the year of disposition.

The following is an excerpt from the 8582 form instructions:

Special Instructions for PTPs

Section 469(k) provides that passive activity limitations must be applied separately to items from each PTP. PALs (Passive Activity Losses) from a PTP generally may be used only to offset income or gain from passive activities of the same PTP. The special allowance (including CRDs) for rental real estate activities does not apply to PALs from a PTP.
Passive activity loss rules for partners in PTPs. Do not report passive income, gains, or losses from a PTP on Form 8582.

Entering a passive loss carryover for Form 8582

For Schedules C, E, F, and Form 4835:
- Enter the carryovers in the Carryovers to 2023 Smart Worksheet near the bottom of the Schedule or Form.
For Partnerships and S Corporations Schedule K-1 Worksheets:
- Enter the carryovers in the Passive Activity Adjustment to Income or Loss section in Column (b) Suspended Loss Carryover from Prior Year near the bottom of the worksheet.
For Estates and Trusts Schedule K-1 Worksheets:
- Enter the carryovers in the Passive Activity Information section in the Suspended Loss Carryovers from Prior Years column near the bottom of the worksheet.