Schedule K-1 - How to report income (loss) on 1040NR

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nikitapunch
Posts: 24
Joined: Wed Sep 02, 2015 10:21 pm
Location: Canada

Schedule K-1 - How to report income (loss) on 1040NR

Post by nikitapunch »

Hi There,

I have gone through the forum to see if my question could be answered but I have not found what I am looking for with my scenario.

I am a Canadian resident working in the US (commuting back and forth) and I was provided a Schedule K-1 for a US connected investment I put money into. I know I will have gains, dividends etc. at some point in the future much like other investments. I don't provide services, just the money to invest.

On this form the only box which has an amount in it is box 1 (Ordinary business income (loss)). This is the first time I have been issued this form and not sure what I need to do with this entry.

Since I gave only money I presume this is considered passive activity/loss and since I am not a US citizen or resident I also presume this is considered NEC (not effectively connected).

I am aware of the treaty we have with the US and I know how to handle dividend and interest entries on the schedule NEC which is part of the 1040NR with the tax treaty rate. I don't have anything like this on the current form so not a question here. Just a comment on my experience/knowledge for those.

I just don't know what to do with this loss in box 1. I was told the income is marked as exempt due to the tax treaty but I don't believe this also means I don't report this on the 1040NR somewhere. I believe what I am provided has impact to future tax years.

If this helps I will provide feedback I had from the investment company. They explained the entry as an operating loss due to the development cost exceeding sales income which I was told has already been accounted for in the uses of capital. In regards to the distributions, they are treating the distributions as return of capital as opposed to a dividend, which is a good thing. Until the entire capital balance (Initial Investment) has been returned in full, I won't be taxed on distributions. Plus any operating losses will allow me to offset any other income I might have.

Their words not mine. Gives me a bit of headache trying to understand all this stuff.

How do I work with this number on the 1040NR? :?
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

Did you look at the back of your K-1. It says to look at Partner Instructions, which is an IRS document.
https://www.irs.gov/pub/irs-pdf/i1065sk1.pdf

Instructions there say to report it on schedule E, which can be attached to 1040NR.
Ultimately the income/loss from this will end up on line 18 of 1040NR.

I'll let you figure out where to put it on your T1.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
nikitapunch
Posts: 24
Joined: Wed Sep 02, 2015 10:21 pm
Location: Canada

Schedule K-1 - How to report income (loss) on 1040NR

Post by nikitapunch »

I did and had a hard time following. A big question mark I had was if this was effectively connected or not effectively connected. Perhaps I should have asked just that.

The line entry points to effectively connected. Going back to the instructions this now makes more sense.

I didn't realize the schedule K-1 included form 8805 (which actually says it is for effectively connected income). Looking at other resources K-1 is considered to be effectively connected income as a result of an LLC's business within the US and therefore I am considered to be engaged in a business operated within the U.S. and get taxed appropriately. So this basically confirms the tax treaty does not apply to box 1 as it is effectively connected.

Now, if I had dividends on the K-1 then I believe this is where the tax treaty might be applied. That I am not sure of. The instructions on this part indicates first page of the 1040NR (but I question this based on feedback from the IRS on another form which stated the same and it ended up on schedule NEC instead.

So I believe it comes down to a distribution versus dividend and how each are both reported.

The instructions did answer the other aspect of my questioning.

Passive and I did not not materially participated according to the IRS read.

The K-1 led to Form 8582 and then form Schedule E. Can't recall which one had it but it was there.
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