Excessive business losses - Form 461

Form 461
Excessive business losses (EBL)

I have the following scenario:
Taxpayer receives F1065, K1 for the 2018 year:
Line 1 $(575,000)
Line 11E $1,800,000

The taxpayer has prior year unallowed losses from the partnership in the amount of $1,150,000. Total losses through 2018-year, $1,725,000.
The taxpayer’s nonrecourse debt amount per the K1 is $1,850,000.
The partnership was ended in the 2018-year.

The issue is that the CODI is not offsetting the loss on Form 461. In my research I have not been able to determine if the CODI can be considered as income from a trade or business (Line 8, Form 461). The AICPA, in their letter dated 28-Feb-19 to the IRS, has made recommendations to include CODI that is attributable to the business. This recommendation indicates, to me, that currently CODI is not an includable amount to offset the loss. The impact to the taxpayer is a $600,00 liability verses $13,000 if the CODI can be included. I believe the question is can CODI be included as gain or loss from a trade or business. Is there any way the loss can be offset against the CODI?

If more information is needed to add clarity to this situation, please let me know.

I am bumping this back to the top with hopes that someone can provide insight for this dilemma.

Did you also reduce the non-recourse debt?

Was the CODI directly related to the prior years' losses?

I am wondering if the K-1 would have to be amended...

Did you also reduce the non-recourse debt?

Was the CODI directly related to the prior years' losses?

I am wondering if the K-1 would have to be amended...

Yes, the non-recourse debt was reduced to zero.

Yes, the CODI is directly related to the partnership.

Why might the K1 need to be amended?

Thank you for your insight.

Even though the CODI was directly related to the partnership, that doesn't mean it was directly related to the activity that produced the prior years' losses. Partnerships and S Corps can have different activities that have to be reported separately. If they have a building rental, and investments into other partnerships, each activity would be reported separately to the K-1 recipient. So, to have better info to research, was the CODI directly related to the activity that produced prior year losses?

Also, was the K-1 marked as final? If not, should it have been?

Do you have the k-1 marked as disposed (if K-1 is marked as final) on the tax return you are preparing?

Even though the CODI was directly related to the partnership, that doesn't mean it was directly related to the activity that produced the prior years' losses. Partnerships and S Corps can have different activities that have to be reported separately. If they have a building rental, and investments into other partnerships, each activity would be reported separately to the K-1 recipient. So, to have better info to research, was the CODI directly related to the activity that produced prior year losses?

Also, was the K-1 marked as final? If not, should it have been?

Do you have the k-1 marked as disposed (if K-1 is marked as final) on the tax return you are preparing?

The partnership had only one activity. The non-recourse debt financed the single activity.

The K1 is marked as final. The partnership was terminated in the 2018 year.

The activity has been reported as disposed on the tax return. The unallowed losses are "released" on the tax return. The EBL is limiting the loss to 500k as the CODI is not reporting on Line 8 of Form 461. The webinars and material do not directly address the treatment of CODI and its applicability to offset the losses.

By "The issue is that the CODI is not offsetting the loss on Form 461." do you mean that your tax software does not do it automatically or do you mean that you have read someplace that it should not?

Software probably puts the CODI on line 21 where it generally belongs on an individual return, but that does not make it unconnected to the partnership. If it was me, I would lean toward putting it on line 8 of the 461 form manually. just because your software didn't do it does not make it wrong.

Correct, the tax software is not automatically reporting the CODI on Line 8, Form 461. My research has not indicated it can or cannot be used to offset the loss. As I also believe it is income associated with a trade or business, the CODI should be reported on Form 461.

Thank you for your insight.