QBI Suspended Loss - Passive Carryforwards

[ElijahM]

Hi,

I have a client who had suspended passive losses as well as QBI suspended losses (passive) being carried forward to his 2021 return on several K-1s from partnerships. In 2021, one of the partnerships sold a property which created a large enough 1231 gain to allow him to use up all of his suspended passive losses. The QBI suspended loss for some partnerships, however, were left to be carried forward to 2022.

Now on the 2022 return, the QBI suspended loss gives the error: "QBI PY Susp Loss should not have a value when no previously disallowed losses are present for regular tax purposes." From what I can tell, the only ways I can get rid of this error is to 1) zero out the QBI suspended loss that is being carried over or 2) add an amount to the passive activity suspended loss carryover from prior year for regular tax purposes. It is my understanding that unused negative QBI should continue to be carried forward until it is ultimately offset by positive QBI. Additionally, the client does not have any suspended loss carryovers for regular tax purposes. Therefore, both of those options seem incorrect to me.

Any advice on how I should go about addressing this error? Thank you in advance.

[rbynaker · Accepted solution]

The glitch is either that ProSeries didn't remove the carryovers when it transferred them to the 8995 OR that it didn't transfer them to the 8995 because the programming wasn't correct.

I would start by "following the bouncing ball" on the 2021 return.  The 2020 suspended losses on each activity may have pre-2018 losses (non-QBI) and post-2017 losses (QBI).  That's what the software should be tracking but double check it.  This was something of a moving target when it went into effect in 2018 so even if ProSeries has it programmed correctly now, I wouldn't assume it's always been tracked correctly.  Then 2021 activity gets stirred into the mix.  The 1231 gain "releases" these losses so the QBI losses can hit the 8995 where they might get stuck again if there are insufficient activities with QBI income.  It sounds like you're saying that all losses were released in 2021.  Is that what the 8995 shows?  They could still be carried over at the QBI level on 8995 Line 16 (or 17 if these are PTPs) so there might not be any impact on the overall tax return.  If you had to use the long form instead, there's an 8995-A Schedule C that will be your starting point.

Rick

[ElijahM]

Rick,

Thank you so much for your help. As you suggested, it ended up being an issue with incorrect allocation of pre-2018/post-2017 losses on the 2021 return which then got carried forward incorrectly to the 2022 return resulting in the error. 

I appreciate you taking the time to respond!

-Elijah