I am struggling with the At-Risk rules for a shareholder of a S-corp who also took out a distribution from the S-Corp. I am trying to input the following scenario into Proseries:
Example 1: Individual A is a general partner in partnership AB, which invests in a single activity. A has a $6,000 basis in his partnership interest and is allocated 50% of profits and losses. At the end of tax year X1, partnership AB has $10,000 of gross income and $30,000 of expenses, resulting in a $20,000 loss. A’s share of this loss is $10,000, and his tax basis (before taking into account his share of the loss) is $6,000.
Under Sec. 704(d), A has an allowable loss for the year of $6,000, and his tax basis is reduced to zero.
I can enter Year 1 info just fine into Proseries and the form 6198 shows a $4,000 disallowed loss - it is in year 2 that I am having the problem:
Example 2: The facts are the same as Example 1. In the following year, X2, partnership AB has $10,000 of income. A’s distributive share of income is $5,000, and he receives a distribution of the same amount.
Under the ordering rules of Sec. 704(d), A may not deduct any of the $4,000 carryover loss, as his tax basis remains at zero following tax basis adjustments for his distributive share of income (+$5,000) and distribution received (−$5,000).
This seems reasonable and if I am reading correctly, in that situation, taxpayer A would pay taxes on the $5,000 in year 2 and would still have the $4,000 loss available to carryover to year 3.
But when I enter the $5,000 income on Line 1 and the $5,000 distribution on line 16D of the K-1 and also enter the $5,000 distribution on line 9 of the Form 6198 - Proseries is calculating only $1,000 taxable in year 2 (not the $5,000 I thought it should be).
1. Is $5,000 the correct taxable amount for year 2 or is the $1,000 the correct amount?
2. If $5,000 is correct, what step am I missing to have Proseries calculate correctly?
I think it might have something to do with the At-Risk recapture rules, but I can't find any further guidance.
A. This sounds like a textbook question.
B. You started talking about s corp shareholder but used partnership info. Which is it?
C. Pro Series k1 doesn't do s corp at-risk well.
I have a S-corp with a similar situation, I don't believe the answer would be any different with the facts given for a S-corp or a partnership (I know loans are treated differently between S-corps and partnerships, but loans are not relevant in my example). Do you have an opinion on whether $5,000 or $1,000 is the correct taxable income in year 2? And any advise on where I get any guidance on how to properly enter it into proseries?
This is an example that PS doesn't do at-risk very well. The ordering function, +income, -distributions(first) and then -limited losses doesn't take into account the distributions.
$5,000 is the correct loss because they took distributions, leaving zero income to be offset by the at-risk carryforward.
Thanks for confirming that $5K is taxable, but the only way I can get Proseries to show that, is to add $4K to Line 21 as other Income and I am afraid Proseries will not track the $4K loss carryforward to the next year. I don't know why that $5K distribution reported on the K-1 doesn't automatically flow over to line 9 of the Form 6198. When I manually enter the $5K to line 9 of the Form 6198, I can't see that Proseries is using that in any of the calculation. It appears that Proseries is totally ignoring the $5K distribution which doesn't seem right, or what other steps am I am missing?