Preserving loss carry forward on K-1 for state income taxes

[Evan Loader]

I think I've asked this question before, but now that I am a few years in I would like to see what others with a more experienced background think. Things have become more nuanced. 

I'm a passive LP investor in multifamily and commercial NNN syndications in multiple states that have a state income tax, doing so since 2019, adding 3-4 net deals per year. If the K-1 is showing a loss, is it necessary to file a state return to preserve that loss to carry forward? Does it depend on the size of the loss relative to your future state income tax liability? The answers I've received in the past are very gray.

To add further complexity, what if I have a high paper loss one year but very little in future years? Do I need to continue filing state income tax returns in subsequent tax years to preserve it carrying forward or only for the year where that specific paper loss is recorded? 

I did receive some sticker shock for tax year 2020 as the tax preparation fees I paid to my CPA were 400% higher than in previous years, but my situation was admittedly more complex(many K-1s in multiple income tax states and overseas income from a W-2 utilizing FEIE). It stung even more when I had to pay $180 per state return just to preserve my paper loss carry forward(5 state returns in 2020, it will be higher in 2021, at least 7, not sure on paper losses yet). So I want to mentally prepare myself for this tax year 2021 and beyond on whether filing these state returns is really necessary all the time when I have a paper loss, or only when paper losses are high. Of course I know I have to always file if a K-1 is showing a profit.  

Any insight or information would be much appreciated. 

[Ashish Acharya]

Originally posted by @Evan Loader:

I think I've asked this question before, but now that I am a few years in I would like to see what others with a more experienced background think. Things have become more nuanced. 

I'm a passive LP investor in multifamily and commercial NNN syndications in multiple states that have a state income tax, doing so since 2019, adding 3-4 net deals per year. If the K-1 is showing a loss, is it necessary to file a state return to preserve that loss to carry forward? Does it depend on the size of the loss relative to your future state income tax liability? The answers I've received in the past are very gray.

To add further complexity, what if I have a high paper loss one year but very little in future years? Do I need to continue filing state income tax returns in subsequent tax years to preserve it carrying forward or only for the year where that specific paper loss is recorded? 

I did receive some sticker shock for tax year 2020 as the tax preparation fees I paid to my CPA were 400% higher than in previous years, but my situation was admittedly more complex(many K-1s in multiple income tax states and overseas income from a W-2 utilizing FEIE). It stung even more when I had to pay $180 per state return just to preserve my paper loss carry forward(5 state returns in 2020, it will be higher in 2021, at least 7, not sure on paper losses yet). So I want to mentally prepare myself for this tax year 2021 and beyond on whether filing these state returns is really necessary all the time when I have a paper loss, or only when paper losses are high. Of course I know I have to always file if a K-1 is showing a profit.  

Any insight or information would be much appreciated. 

- Yes you have to file. 

- You have to continue to file. 

- if a compliance fee is an issue, the partnership should file a composite tax return on your behalf. That is something you want to request from your sponsor.