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Limiting the amount of a taxpayer's share of the K-1 loss in an S-Corp. to his basis in the S-Corp.

Glenn Z
Level 1

 

In a case where the taxpayer’s share of the ordinary loss reported on a K-1 from an investment in an S-Corp. exceeds his basis, the section titled “Disallowed Smart Worksheet” at the bottom of form 6198 does not populate automatically, even if the beginning of the year basis is reported in both the Simplified Computation and the Detailed Computation sections of form 6198.  It appears that you must “override” the fields in the “Disallowed Smart Worksheet” to limit the loss.  Is there a way to get the fields to populate automatically, so you do not have to “override” any fields in the tax return?

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13 Replies 13
IRonMaN
Level 15

Normally, no overrides are required.  Out of curiosity, has the loss been limited on the actual 1040?

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TinaEA
Level 2

no the 1040 is NOT limiting the losses, that is what it should do, via computations and a worksheet but it is NOT, from what i am reading you have to override the calculation, which i HATE to do and ProSeries Professional s/b able to handle.....i know they aren't having this problem in Drake......

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TaxGuyBill
Level 15

@Glenn Z wrote:

exceeds his basis, ... form 6198 does not populate automatically


 

Although I realize that some people use Form 6198 as a work-around, that form is NOT used for limiting Basis.  That is for At-Risk Limitations, NOT Basis Limitations.  So that may be why it is not populating automatically.

In ProSeries, you need to limit Basis manually.  Only enter the amount of the loss allowed (if any) and MANUALLY carry over any excess losses.

TinaEA
Level 2

I am having the same problem.....ProSeries is not limiting the loss due to no basis....all the prior year carryforwards are filled out...and basis worksheet is filled out but full loss is being carried to Sch E and it should not be....how to fix ????  Taxpayer can not take loss in excess of basis

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TaxGuyBill
Level 15

@TinaEA   Did you read my comments above?  ProSeries does not have a Basis worksheet for the 1040, and you need to manually limit it.

TinaEA
Level 2

Yes @TaxGuyBill i see how you are doing it, i just think with all the other supporting schedules, ProSeries should have this implemented.

I hate having to change raw data numbers

So for line 1 you use the supporting schedule and list the loss from K-1 and then next line Loss Disallowed and carryforward to 2021 as a positive number, which will net to the allowed loss due to basis.

Do you do any workarounds on the 6198 ???

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TaxGuyBill
Level 15

Form 6198 is for At-Risk limitations, not Basis limitations (which comes before At-Risk).

When the disallowed losses get more complicated due to other lines on the K-1 being limited, temporarily using the 6198 to check/verify your manual calculations for the limits may be helpful.  But after using the 6198 as a temporary worksheet, be sure to delete it because it should not be filed with the tax return.

ProSeries does not have a Basis worksheet, which is REQUIRED to be part of the tax return when claiming losses or distributions, so be sure that you manually attach a PDF of a Basis worksheet to the tax return.

Terry53029
Level 12
Level 12

If the K1 issued to shareholder for his/her 1040 has an negative entry on line 1, and it is in excess of basis, I will fill out the supportive statement for line one, limiting  the loss to basis. I also make note for line one, so it will carry over to next year as to basis limitation.

TinaEA
Level 2

Thank you Terry !

But shouldn't ProSeries allow you to put in the actual K-1 numbers and then when you enter the basis information, automatically calculate the disallowed portion of the Line 1 Operating Income(Loss) and then do the carryforward ?

I see that form 6198 it is limiting the loss to the stockholders basis (Beg year basis = 0, had $58k contributions) so Part IV Deductible Loss line 21 shows an allowed $58k deductible loss

Why doesn't this carry over to the Sch K-1 Wks S Corporations Section A Passive Activity Adjustment to Income or loss ?  Column A shows the loss from the 2020 K-1, column B shows the prior year disallowed loss carryover, Column C is showing the full amount of the K-1 Line 1 Loss as ALLOWED and column D is showing the Loss Suspended for the Current Year (which is the same number as in column b for the prior year)

This spreadsheet should pull the allowed loss ($58k) for column c Allowed and then add the balance of 2020 loss that is disallowed to the prior year disallowed and that combined disallowed carryforward number s/b in column (d) Loss Suspended for Current Year

It is NOT......This Section A worksheet does not allow changes to the current year allowed or disallowed losses and does not pull the information from the Form 6198 ???

Is there some checkbox somewhere i have done or not done that makes the program do this ???

Thanks in advance !!!

I really want a paper trail for the allowed and disallowed losses, i do NOT want to have to do an override.

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Terry53029
Level 12
Level 12

From IRS, "It is important to understand that the K-1 reflects the S corporation's items of income, loss and deduction that are allocated to the shareholder for the year. It is not the corporation's responsibility to track a shareholder's stock and debt basis but rather it is the shareholder's responsibility".

See link: https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-stock-and-debt-basis

TinaEA
Level 2

I understand that .....but its still frustrating....and from what i have found out from my colleagues using Drake....Drake limits the raw K1 Line 1 losses and does a nice carryforward worksheet automatically.

I still think ProSeries Professional should have this capability.

But it thank you all for the guidance and help !!!

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TaxGuyBill
Level 15

@TinaEA wrote:

I understand that .....but its still frustrating....and from what i have found out from my colleagues using Drake....Drake limits the raw K1 Line 1 losses and does a nice carryforward worksheet automatically.

I still think ProSeries Professional should have this capability.

 


 

Most professional tax software has that capability.  All professional tax software SHOULD have that capability.  But unfortunately, ProSeries does NOT have that worksheet or ability to automatically limit losses due to Basis.

TinaEA
Level 2

for the 199a Ordinary business income (loss)....we should do the same thing so the allowed loss only shows on that line, correct ?

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