K1 loss tax report for non-resident state (NC)

[Evelyn Guo]

Hi,

 I am using Turbo tax to file K1 form, the NC state tax is filed as non-resident alien. I had a passive loss form the syndication, I am not sure whether I should input 0 or the actual loss number in D-400 Schedule PN Line 11 Column B.

My confusion is for federal tax, I know passive loss should be filed with 8582 and put 0 in 1040. But if I put 0 for the state tax, my follow up question is how should I report this passive loss to NC which may be used to deduct future passive income.

If you know any detail tax instruction for NC state that can help with case that would be also very helpful!

Thanks!

[Ashish Acharya]

The unallowed losses tracked on the federal will be carried over to both the federal and state level in the future. You don't need to track losses at the state level. 

[Evelyn Guo]

Thanks Ashish!

[Evelyn Guo]

Quote from @Ashish Acharya:

The unallowed losses tracked on the federal will be carried over to both the federal and state level in the future. You don't need to track losses at the state level. 

Hi Ashish,

I have a similar case in GA. The only income source I have in GA is a K1 with passive loss, do I still need to file state tax? If I need to report, but all related fields are 0. In that case, state doesn't receive any information about this passive loss(Turbotax doesn't include federal form 8582 in GA state filing). If I don't need to report, I heard I may get audited at the year of sale. See here.

Thanks,

[Tushar P.]

Quote from @Ashish Acharya:

The unallowed losses tracked on the federal will be carried over to both the federal and state level in the future. You don't need to track losses at the state level. 

I’m not sure if this is always correct. NJ state return specifically tracks the loss carry forward.

Also, what do you make of this statement from CO tax booklet “A nonresident of Colorado may source to Colorado passive losses carried over from prior tax years and claimed in arriving at federal adjusted gross income to the extent such nonresident had Colorado source passive losses in prior tax years not previously claimed for Colorado income tax purposes.” - does the last point mean that CO passive losses used in prior years (not just previous year or current year) for offsetting passive income at federal level can be used to offset CO passive income in current year if they were not used for offsetting CO passive income in prior years (because there was no CO passive income in prior years)? If yes, then just tracking previous year’s 8582 is not enough.
@Michael Plaks I think the quote will need to be read a few times haha (who writes these tax codes 🙄)

[Michael Plaks]

@Tushar P.

Who writes the tax code? People with cushy government paychecks and benefits and job security.

I agree with you that state and Federal losses are not necessarily tied. The amount of loss on a state return is more often than not different from that on the Federal return. Especially for non-residents and part-year residents.

[Eric Williams]

Quote from @Ashish Acharya:

The unallowed losses tracked on the federal will be carried over to both the federal and state level in the future. You don't need to track losses at the state level. 

 I agree, CPA two masters here. The NC return is correct as is in my opinion.

Remember that states often piggyback off Federal amounts, often AGI or taxable income (then make upward or downward adjustments for things like 179 or depletion).

Since the passive loss did not enter the taxable income calculation at the Federal level, it won't flow to the state return when NC piggybacks.

[Basit Siddiqi]

Each State is different.

Some states require you to track the passive losses at the state level.
There may be a state equivalent of the form 8582 or there may be a completely different state form.

Also be mindful that some states do not recognize bonus depreciation so there may be some federal / state differences for rental income.

[Joshua Weage]

I have the same question, but this issue is more complex when an investor has multiple investments in different states with federal passive losses carried forward from multiple states.

I doubt that states intended to allow non-residents to not pay state income tax by offsetting state sourced income with non-state sourced passive losses. This is specifically what the Colorado nonresident statement is addressing.

Colorado is one of the few states which explicitly mention this in their instructions.

When you receive a state K-1 which reports positive income for a state, this doesn't take into account prior passive losses as it is up to the taxpayer to allocate income/loss to the specific state on the state tax return. It is easy to show a situation where someone has a rental loss on the Federal return but has significant positive rental income in a state with no state sourced passive losses. Do they still not pay state income tax? This can easily result in a situation where some states never collect tax revenue and other states collect more than they deserve due to mis-allocation of passive losses.

For NC, it doesn't appear that the state tax code addresses this situation.

"17 NCAC 06B .3904 TAXABLE INCOME OF NONRESIDENTS AND PART-YEAR RESIDENTS
(a) Nonresidents and part-year residents shall prorate their adjusted gross income, adjusted as required under G.S.
105-153.5 and G.S. 105-153.6, to determine the portion that is subject to North Carolina tax."

"The taxable income of a nonresident subject to North Carolina income tax is determined
by first calculating federal adjusted gross income as calculated under the Internal Revenue
Code, adjusted as provided under G.S. § 105-153.5 and G.S. § 105-153.6.
The result is multiplied by the percentage obtained when dividing the portion of total federal gross
income derived from North Carolina sources, as adjusted, by the total federal gross income,
as adjusted. Importantly, the percentage may be over 100% if a taxpayer’s North Carolina
sourced income is greater than the taxpayer’s total income from all sources.

Note: Only North Carolina adjustments that relate to a taxpayer’s gross income can be
included when determining the proration percentage. See Schedule PN and Schedule PN-
1 for additional information."

I could read that as saying non-North Carolina sourced passive losses shouldn't be used to calculate North Carolina income.

[Tushar P.]

For an investor with multiple investments in different states, it is very possible for a specific investment to have the unallowed loss as zero in the federal 8582 (i.e. all the losses from prior years already used up to offset gains at the federal level) without having had any gains from that specific investment. Now when the final K1 shows a big gain at federal and state levels for that specific investment, can the gain at the state level be offset by all the prior years losses (corresponding to that specific investment) that were used up to offset the gains at the federal level only?

Conversely, if the federal 8582 shows zero unallowed losses, is the game over for offsetting gains at the state level even when the prior losses were not used to offset the gains at the state level? @Michael Plaks  @Basit Siddiqi  @Ashish Acharya

[Joshua Weage]

Based on reading relevant state tax instructions, tax code, feedback from other investors and CPA's, I'm tracking unallowed passive losses at the state level for states which otherwise do not require unallowed passive losses to be filed on state returns or for which they are not disallowed. Colorado and North Carolina specifically.

For these states, I would only claim prior state sourced passive losses against state sourced income on a non-resident return.

With this approach, a state will receive taxes for all net income earned in that state.

I think the issue is whether "total federal gross income derived from North Carolina sources" means passive losses also must be from North Carolina sources. I assume it does. Can anyone cite relevant case law which clarifies this?