Is it optional to take a passive loss deduction?

Question

I'm in two partnerships that lost money due to the pandemic. Those losses are supposed to be offset by the government in PPPs and ERCs, but the full payment of those has not been received yet. Due to the complexity of all this, we've received revised K-1s for 2020 and the K-1s for 2021 were delayed and finally arrived today.

The e-mail with the K-1s says "if you did not use your loss for 2020, it will offset later gains. As a passive investor, you should not have used the 2020 loss." Because of the revised K-1s for 2020, I have to file an amended return, and that e-mail seems to be telling me that I have the choice of whether to take the 2020 loss in 2020 or carry it forward.

But IRS Form 8582 tells me to calculate the amount of unallowed and allowed losses and then enter the result on Schedule E. It does not say that I can voluntarily reduce the amount of loss claimed in order to preserve that loss to be applied in a later year.

I do not have passive income in 2020 for the losses to offset, so if the full amount of allowed losses calculated on Form 8582 is entered on Schedule E, then I'm losing the ability to apply those losses against later income.

So my question is, can I voluntarily reduce the amount of passive loss claimed in order to preserve that loss to be applied in a later year? If so, where can I find that in the instructions?

Answer 1

Because of the revised K-1s for 2020, I have to file an amended return, and that e-mail seems to be telling me that I have the choice of whether to take the 2020 loss in 2020 or carry it forward.

No, it says that you should not have taken the 2020 loss since you're a passive investor. Why it says that you'll have to inquire with them or have your tax adviser explain to you.

So my question is, can I voluntarily reduce the amount of passive loss claimed in order to preserve that loss to be applied in a later year? If so, where can I find that in the instructions?

No, you cannot. You can skip the deduction, if you want, but you cannot defer it to a later year (unless PAL or NOL kicks in, which in this case seems not being the case). Even skipping the deduction may be a problem since you certify under penalty of perjury that your tax return is correct when you sign it.