TaxGuyBill
Level 15
09-01-2020
02:31 PM
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I haven't looked at the Code in regards to this yet, but Worksheet B in the Instructions definitely seems to indicate the loss needs to be factored in as Earned Income (as Lacerte did).
Lines 1 would show the profit, and Lines 2 shows the loss. Both are used for calculating the Earned Income on Lines 4.
https://www.irs.gov/pub/irs-pdf/i1040gi.pdf#page=44
My first thought is to fill out the Worksheet B and submit that as a reply to the IRS notice. But before you do that, you may want to double-check that is actually what the IRS is disallowing.