K-1 passive or nonpassive with multi-tiered entities

Technical topics regarding tax preparation.
#1
JoJoCPA  
Posts:
560
Joined:
1-Sep-2019 2:57pm
Location:
Massachusetts
Client is an employee of Insurance Agency LLC and gets a W-2 from this entity. He is not an owner of this entity. This is his full-time job. Insurance Agency LLC is owned by two other entities and one of those entities is owned by another entity (Holding co. LLC) that is owned by my client and several other employees of Insurance Agency LLC. My client owns 16% of Holding Co. LLC. The only income as far as I know is the flow-down of the income from Insurance Agency LLC through all the layers ultimately down to my client. The 2022 K-1 shows an ordinary loss of $20K. It also gives 199A detail showing the same loss and the name of Insurance Agency LLC (if this is relevant).

Should this loss be classified as passive or nonpassive? Don't you look to the activity of the income that is flowing down to my client's K-1, the insurance agency business income and whether my client materially participates in that business? If so and he's compensated for his services via the W-2 from Insurance Agency LLC, do you count those hours spent towards the material participation tests?

He does not participate in the management of the Holding Co. LLC and is listed as a "limited partner or LLC member" on the K-1.
 

Return to Taxation



Who is online

Users browsing this forum: CaptCook, CoastalCPA, dsocpa, golfinz, Google [Bot], Google Adsense [Bot], IDunnoItDepends, JAD, JoJoCPA, JR1, ManVsTax, MAPCPA60, missingdonut, Nightsnorkeler, Nilodop, NorthCAEA, sjrcpa, TaxCut, TAXMASTER, taxtothebest, zl28 and 196 guests