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Where to record S corp basis limitation on 1040

Answer it
Level 1

I have a client with a S corp loss, but no basis.  When I enter the K-1 with the loss in the 1040, it populates the loss on Schedule E.  How do I show that there is no basis and get Schedule E to show zero.  Where does the carryover loss show in Proseries?

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TaxGuyBill
Level 14

You are supposed to only enter the amount allowed (in your case, $0) and manually carry over any amount to use in future years.  ProSeries is deficient it this regards, and does not  have a proper mechanism to limit losses due to Basis (or to carry over that unused amount).

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TaxGuyBill
Level 14

You are supposed to only enter the amount allowed (in your case, $0) and manually carry over any amount to use in future years.  ProSeries is deficient it this regards, and does not  have a proper mechanism to limit losses due to Basis (or to carry over that unused amount).

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ClintCPA
Level 3

TaxGuyBill: If you manually enter only the allowed loss on line 1, should modifications be made to the QBI amounts in Proseries? or any other lines on the K-1 worksheet?  Or is it recommended to only modify line 1 of the K-1 to limit the loss due to basis?

 

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TaxGuyBill
Level 14

I don't think anything else needs to be changed.

ClintCPA
Level 3

TaxGuyBill,

I have a few additional questions.  Not sure if you are open to a paid phone consultation.  If so, I would welcome the opportunity to pick your brain more on this topic regarding ProSeries and Basis limitations.  

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TaxGuyBill
Level 14

I'm not big on phone calls, but you are welcome to post any questions here and I'll try to answer when I have time.

ClintCPA
Level 3

TaxGuyBill: Thank you for your help.  Just curious as to why you may feel that the QBI worksheet at the bottom of the K-1 on the 1040 may not need to be adjusted for basis limitations.  Would the limited losses not impact the QBI carryovers since the K-1 line 1 amount is part of the QBI calculation (for line 17V of the K-1)?  

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TaxGuyBill
Level 14

After looking at things, I think you are right.  I originally didn't think the Basis limitation would affect QBI, but I think I was wrong.

This FAQ from the IRS isn't directly about this question, but it does provide insight on it (note the section I put in bold) that makes me think you are right, you do need to adjust QBI:

 

A34. The pass-through entity is required to provide the owners QBI information necessary for the owner to compute the deduction. If the entity only has ordinary income from a single trade or business, it may be appropriate to reflect one QBI amount. Some QBI items from a pass-through entity, such as section 1231 gain or loss, may need to be identified separately due to the potential of unique treatment on one or more owners' returns. Items not included in current year taxable income are not included in QBI. Therefore, additional details will also need to be provided for the owners. If for example, in addition to ordinary income the owner is allocated a section 179 deduction, since the 179 deduction may be limited, the detail would be required in order for the owner to properly determine the current year QBI. The instructions for pass-through entity filers include statements that pass-through entities can use when reporting items with respect to the QBID for tax years 2019 and forward.

Also note that the rules to separately state items from each activity for the application of the at-risk rules and passive activity loss limitation rules still apply even when a pass-through entity chooses to aggregate a trade or business for the purposes of section 199A.

https://www.irs.gov/newsroom/tax-cuts-and-jobs-act-provision-11011-section-199a-qualified-business-i...

ClintCPA
Level 3

TaxGuyBill:

Thank you for the follow up.  I appreciate your time to review my questions and provide feedback.  It is very helpful!!

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ClintCPA
Level 3

TaxGuyBill:

A similar question.  If basis limitation disallows S-Corp charitable contributions for the year, I assume the K-1 would be adjusted to remove the current year charitable contributions that are disallowed also (i.e. just lower the charitable contribution amount to equal the amount allowed by basis).  

Does that make sense?

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TaxGuyBill
Level 14

That seems logical.   😁

However, what exactly was the charitable contribution?  Was it cash?

If it was non-cash, there are additional rules to consider in regards to the Basis that the corporation has in the donated property.

If that applies to the donations, I did a quick Google search and came up with this:

 

IRC section 1367(a)(2) flush language provides that S corporation shareholders will decrease basis in S corporation stock (or debt after stock basis is reduced to zero) by their pro rata share of the S corporation’s adjusted basis in the property contributed to charity. In Revenue Ruling 2008-16, the IRS clarified that the shareholder’s basis is not reduced by the appreciation of the contributed property. Thus, while the shareholder reduces his stock (and debt) basis by his ratable share of the basis in the contributed property (but not below zero), he will pass through his ratable share of the contributed property’s basis, limited to his basis in S corporation stock and debt, plus his ratable share of all the appreciation on the contributed property. In other words, the deduction is based on the fair market value of the charitable contribution.

The rule that limits the pass-through of the deduction to the stockholder’s basis in S corporation stock and debt does not apply to the appreciation of property contributed to charity by the S corporation. Even when the shareholder begins with zero basis in his S corporation stock (or debt), the appreciation of contributed property will pass through as a charitable contribution. In effect, the deduction is prorated to the portion limited by (and reducing) basis and to the appreciation.

https://www.cpajournal.com/2019/05/13/charitable-contributions-by-s-corporations/

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ClintCPA
Level 3

These are cash donations.  Thanks again for your help!!

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ClintCPA
Level 3

TaxGuyBill,

This ProSeries basis limitation issue is going to be the death of me!!!  I want to see if I can run a scenario by you.  Here it is:

S-Corp client has disallowed losses of $187.9k due to basis limitations from 2019. 

Beginning shareholder basis in 2020 is $0.  2020 K-1 has $90.1k in ordinary income on line 1, $15.3k in tax exempt income (increases basis), and shareholder had $40.6k in draws and $0.1k in non-deductible items.  Basis looks like $0 beginning + $90.1k income + $15.3k tax exempt income - $40.6k draws - $0.1k non-deductible =$64.7k in available basis for 2020 to apply towards prior year losses.

I am trying to determine what amount to enter on line 1 of the 1040 ProSeries K-1 and what amount (if any) would go on Sched E, P2 for a PYA.

I was thinking $0 on line 1 of the K-1 and no PYA, but I am not so sure this is correct when I go back to review it. 

Your thoughts are appreciated.

 

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TaxGuyBill
Level 14

@ClintCPA wrote:

TaxGuyBill,

This ProSeries basis limitation issue is going to be the death of me!!!  I want to see if I can run a scenario by you.  Here it is:

S-Corp client has disallowed losses of $187.9k due to basis limitations from 2019. 

Beginning shareholder basis in 2020 is $0.  

2020 K-1 has $90.1k in ordinary income on line 1

$64.7k in available basis for 2020 to apply towards prior year losses.


 

Wouldn't it be $64.7 in basis to use the CURRENT year gain (Box 1)?  So you would enter $64.7 on the K-1 worksheet, and the excess would get added to the other $187.9 to get carried to next year, right?

See comments below.

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ClintCPA
Level 3

I think I follow the logic.  I enter the $64k on K-1 line 1. 

I would also then enter a PYA loss on Schedule E page 2, correct?  This zeroes out the income for the current year leaving $122k carried forward.

$187k prior year carryforward loss minus $64k income in 2020 = $122k carryforward to 2021.  

Let me know if this makes sense.  

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TaxGuyBill
Level 14

Hmmm, I think my original thought process was messed up (I may have been thinking thinking a loss in Box 1).   I shouldn't be answering questions when I'm tired.  🙂

It had $90.1 of INCOME, so that should stay on the K-1.  You still need to report the full amount of income.

But then you have $64 in Basis left.  That $64 would would be PYA, and the rest carried over.

Does sound more logical?  😁

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ClintCPA
Level 3

This is where it is confusing. 

So $90.1k in income on line 1 of the K-1, $64k in basis for 2020 which becomes the PYA, so then even though the client has $187k total carryover losses from prior years, they would then report $26k in income for 2020?

$90k on K-1 line 1 less $64k in PYA losses =  $26k income for 2020.  

What seems strange (and where I get confused) is why they would report any income in 2020 since they had so much in prior year losses.  

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TaxGuyBill
Level 14

Losses aren't used against income, they are used against Basis.  And although you received $90.1 in Basis, part of the Basis was used up by the Distributions.  So yes, they will pay tax on the $26.  If they hadn't taken Distributions, then there wouldn't be taxable income.

ClintCPA
Level 3

Okay, that is starting to make sense.  I follow the logic.  Thanks for clarification.  I am sure I will be back in the future with more questions.  

I appreciate the help as always.  Your insight is very valuable.  

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