K-1 Other Deductions Business Interest Expense

Forum|Forum|11 months ago
April 6, 2025
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Hello:

I received a K-1 which lists Rental Income (Line 2) and Interest Income (line 5) with a deduction in Box 13 coded AC (Interest expense allocated to debt financed distributions).

Turbotax flags the deduction by requiring more information on Schedule K-1 Additional Information. Am I correct in assuming the entry for this deduction is on line 7 (Invetsment Interest Expense) of Box 13 Other Deductions:, Code W to ZZ: Other Deductions? If not, what is the correct treatment?

FYI, The K-1 includes the following statement: This entity has filed an election under IRC Sec 163(J) to be treated as an excepted trade or business and is therefore not subject to the business interest expense limitation.

Many thanks for your reply,

Mike9241

Business interest expense (line 13K) is different than interest on debt-financed distributions 13AC.

here are the rules taken straight from the k-1 instructions

Code AC. Interest expense allocated to debt-financed
distributions. The manner in which you report such
interest expense depends on your use of the distributed
debt proceeds. If the proceeds were used in a trade or
business activity, report the interest on Schedule E (Form
1040), line 28. In column (a), enter the name of the
partnership and “interest expense.” If you materially
participated in the trade or business activity, enter the
interest expense in column (i). If you didn't materially
participate in the activity, follow the Instructions for Form
8582 to figure the interest expense you can report in

column (g). See the definition of material participation,
earlier. If the proceeds were used in an investment activity,
report the interest on Form 4952. If the proceeds are used
for personal purposes, the interest is generally not
deductible.

https://www.irs.gov/pub/irs-pdf/i1065sk1.pdf

Lorob11Author

Mike9241

Many thanks for swift answer. Unfortunately, the distributions (including those that were debt financed) were simply rolled into other personal investments, and I did not materially participate in PS. On a technical note, I must still answer the TT query for its treatment on K-1 "Additional Information". Should I simply move it to line 7(b)(2) ("disallowed investment interest expense") which nets out the deduction? Alternatively, should I simply leave Box 13 blank?

Appreciate your interest.

PatriciaV

Yes. Because the proceeds were used for personal purposes, the interest expense is not deductible. Either move the amount to Line 7(b)(2) or leave box 13 blank.

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