Understanding QBI Treatment on 1040 vs 1065 for LLC Members with Passive Losses

The software is actually handling this correctly. When you have passive losses from an LLC, those passive activity losses are subject to limitations on your personal return. For your first question: You should keep the actual negative QBI amount on the 1065 form - don't change that. On your personal return (Schedule K-1), the passive loss limitations are kicking in, which is why the software is zeroing it out. These disallowed passive losses don't disappear - they're suspended and carried forward until you either have passive income to offset them or you dispose of your entire interest in the activity. For your spouse as an active participant: The negative QBI should flow through to her K-1 without being zeroed out because active participants aren't subject to the same passive loss limitations. That's the correct treatment. As for forms, you'll need Form 8582 "Passive Activity Loss Limitations" to track these suspended losses. Most tax software will generate this automatically based on your inputs, but double-check that it's included. The software should also handle the carryforward to next year automatically. Neither of you will get a QBI deduction this year since your QBI is negative, but these amounts will factor into future year calculations when you have positive QBI.

I had the same issue with my LLC last year. Found this tool called taxr.ai (https://taxr.ai) that helped me make sense of all the QBI and passive loss rules. I was super confused by all the carryforward stuff until I uploaded my previous year's return and it broke everything down for me. The thing that surprised me was how different the QBI treatment is for passive vs. active members. Turns out the software was right to zero out my negative QBI as a passive member, but I didn't understand how that would affect future years until I got it analyzed properly.

After seeing it mentioned, I decided to try taxr.ai for my similar situation with my family's LLC. I was honestly surprised at how helpful it was. It showed me that I had been handling the QBI incorrectly for two years! What was most useful was seeing exactly how the passive loss limitations were being applied to my K-1 income. The analysis showed that while my QBI was being zeroed out on my personal return, it was still being tracked behind the scenes for future use. There was actually a worksheet in my return that I had completely missed that was carrying these amounts forward. The tool also helped me understand the relationship between Form 8582 and the QBI calculation, which my previous accountant had never explained. I ended up filing an amended return based on what I learned and got back nearly $2,300.

If you're still struggling to get through to an actual tax professional about this QBI issue, I'd recommend trying Claimyr (https://claimyr.com). I was in the same boat trying to reach the IRS about a similar passive loss issue for weeks - constant busy signals and disconnects. Claimyr got me through to an IRS agent in about 20 minutes when I'd been trying for days on my own. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. The agent was able to confirm exactly how the QBI passive loss should be treated and how it would carry forward on Form 8582. Just knowing I had the official word from the IRS gave me confidence to proceed with my return, and they explained the whole passive activity loss carryforward process much better than any website I found.

I have to admit I was completely wrong about Claimyr. After posting my skeptical comment, I decided to try it since I was desperate to talk to someone about my QBI passive loss issue. It actually worked! After about 35 minutes (during which I just went about my day), I got a call connecting me to an IRS agent who was incredibly helpful about my passive loss limitations. The agent confirmed that the negative QBI should remain on the 1065 K-1, but gets limited on my personal return through Form 8582. The agent also walked me through exactly how these losses carry forward and how they'll be treated when the LLC starts generating positive income in the future. Turns out there was a worksheet I needed to keep with my tax records that shows the suspended QBI amount. This saved me from making a mistake that could have cost me thousands in future deductions. Worth every penny for the peace of mind alone.

Just to add another perspective to the QBI discussion - make sure you're tracking your basis in the LLC separately from the QBI calculations. I made the mistake of confusing these two concepts and it caused problems later. Even if your QBI is zeroed out due to passive loss limitations, you still need to track your basis in the LLC which is affected by the losses allocated to you. Your basis can go negative in some circumstances (like if you have partnership debt), but that's separate from how QBI is treated. Also worth noting that if your spouse materially participates and you don't, your spouse might qualify for the QBI deduction in future profitable years even if you're still working through suspended passive losses.

Something important that hasn't been mentioned yet - make sure you're tracking your "at-risk" amount separately from both your basis and your passive activity amounts. It's a third limitation that can affect how losses are treated. I learned this the hard way with my LLC. Even though I had sufficient basis and wasn't limited by passive activity rules (because I was active), I still couldn't take some losses because of the at-risk rules. The tax software didn't explain this clearly. For your spouse who is active, their "at-risk" amount might become the limiting factor rather than the passive activity rules. For you as the passive investor, you'll likely hit the passive activity limitations before the at-risk limitations come into play.

This is a great discussion that really highlights how complex LLC taxation can get when you have mixed active/passive ownership. I've been dealing with similar issues in my practice. One thing I'd add for future reference - it's worth having your LLC operating agreement clearly define each member's level of participation upfront. This can help avoid confusion later when determining who qualifies as active vs passive for tax purposes. Also, @Mary Bates, since you mentioned this is an ongoing issue, you might want to consider whether it makes sense to elect S-corp taxation for your LLC (Form 2553). While it won't eliminate the passive loss limitations for you as a passive member, it could simplify some of the QBI calculations and potentially provide other benefits depending on your specific situation. The key takeaway from all these comments is that LLC losses involve multiple layers of limitations (basis, at-risk, and passive activity) that work in sequence. Each one needs to be tracked separately, and most good tax software will handle this automatically - but it's always worth verifying the forms are being generated correctly.