J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

10.11 Partners and Members of LLCs and LLPs

As a general partner, your share of partnership income or loss during the partnership year ending within your tax year is passive or nonpassive, depending on whether you materially participated under any of the seven IRS tests(10.6) in the partnership activities during the year. Limited partners have a reduced ability to show material participation as discussed below. On Schedule K-1 of Form 1065, the partnership will identify each activity it conducts and specify the income, loss, deductions, and credits from each activity.

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Planning Reminder

Publicly Traded Partnerships (PTPs)

A PTP is a partnership whose interests are traded on established securities exchanges or are readily tradable in secondary markets. PTPs that are not treated as corporations for tax purposes are subject to special rules that allow losses to be used only to offset income from the same PTP. See the instructions to Form 8582.

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EXAMPLE

Don Bailey is a general partner of a fiscal year partnership that ends on March 31, 2012. During that fiscal year he was inactive. Since he did not materially participate, his share of partnership income or loss reported in 2012 is passive activity income or loss, even if he becomes active from April 1, 2012, to the end of 2012.

Not treated as passive income are payments for services ...