This article will help clear the following informational diagnostic generating for a passthrough partnership:
- Partnership X: A negative basis was computed of [shows dollar amount]. Per Internal Revenue Code Section 731(a), the distributions that caused the negative basis amount is taxable as a capital gain. The program does not automatically compute this gain. Any gain required to be recognized must be entered into the disposition screen. Don't increase the basis for the amount of capital gain reported for the excess, since the program already limited the basis to zero. (ref. #6585)
Follow these steps to resolve this diagnostic:
- Go to Input Return ⮕ Income ⮕ Dispositions ⮕ Sch D/4797/etc.
- Enter the Description of property.
- Enter a negative date in the field Date acquired.
- Enter a negative date in Date sold.
- Enter the excess of basis in Sales price.
- Select Details for the asset.
- Select the Less Common Scenarios tab.
- Scroll down to the Corresponding Activity Information - Passive (8582)/Investment Tax (8960)/Qualified Business Income (QBI) section.
- Select the Form number of related activity dropdown menu.
- Select Schedule E (partnership).
- Enter the applicable Activity name or number.
- Check the box Include in at-risk/basis limitation.
The diagnostic mentions to enter the gain on Input Return ⮕ Income ⮕ Passthrough K-1's ⮕ Partnership Info., under the Basis Tab ⮕ Basis Limitation section in Other current year increases to basis. However, by selecting the box mentioned in Step 10, Include in at-risk/basis limitation, this action doesn't need to be completed.
Completing the above steps will include the gain on the Schedule D and the basis limitation schedule. This will also resolve the diagnostic mentioned above.
If you prefer to enter the gain manually:
If you'd prefer to enter the gain manually, don't select Include in at-risk/basis limitation checkbox, and instead enter the amount of excess on Input Return ⮕ Income ⮕ Passthrough K-1's ⮕ Partnership Info., under the Basis Tab ⮕ Basis Limitation section in Other current year increases to basis.