Understanding passive loss limitations for K-1 Losses in ProConnect Tax

For more Schedule K-1 resources, check out our Tax topics page for Schedule K-1 where you'll find answers to the most commonly asked questions.

This article will help you understand passive loss limitations for K-1 losses and how ProConnect Tax calculates allowable loss amounts.

What are passive loss limitations

The passive limitation is the third of three limitations applied to income-producing activities. The losses must apply in the order listed:

• Basis limit
• At-risk limit
• Passive limit

Generally, passive activities include the following.

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

How are passive loss limitations calculated?

The passive loss limits are computed on Form 8582. A passive loss limitation occurs when total losses (including prior year unallowed losses) from all your passive activities exceed the total income from all your passive activities.

Passive activity losses not allowed in the current year are carried forward until they’re 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.

How do I generate Form 8582 for passive loss limitations?

Follow these steps to enter a passive loss for a K-1 activity:

1. Go to Input Return
2. On the left, select Income ⮕ Passthrough K-1's ⮕ Partnership Info (1065 K-1) or S-Corp Info (1120S K-1)
3. Ensure the Not a passive activity box is unchecked
   • K-1s are assumed to be passive, but if this box is checked, the K-1 will ignore passive loss limitations.
4. Check the Actively participated in real estate box if applicable
5. Enter the current year items for the K-1
6. If the return has prior year passive carryovers that need to be entered:
   1. Across the top, select Passive C/O
   2. Enter the applicable Regular and AMT carryovers from prior years.

ProConnect Tax will use your entries to generate the Form 8582 if applicable and the losses allowed will flow to Schedule E Page 2.