Wasted Loss:(

[Harvey Lucas]

I want to make sure I am not missing something here.

Client has a flow thru on a 2008 k1 scorp.

I will keep the numbers simple.

Line 9 of his k1, "net section 1231 gain(loss)" indicates a loss of 90,000.

The loss originates from the 1120s, form 4797, Part I, sale of business asset goodwill.

Assuming he has adequate basis in the Scorp to cover the loss, the loss is fully deductible on his 2008 1040 against other income.

He files a joint return with his wife, their combined income in 2008 from w2 is 40,000.

It looks to me that the entire 90,000 loss is "used up" in 2008.

It wipes out their tax liability for 2008, but there is nothing left to carry over?

The 90,000 loss is not limited by the $3000 per year loss on long term capital losses?

I went onto his 1040 and keyed in a regular old 4797 duplicating a similar transaction on the 1040 level and the result is the same, ie, no loss carryforward, total consumption (waste) of the loss in 2008.

Am I missing something here?

Harvey Lucas

[Gretel]

I think it would create a NOL. The loss comes from biz operations. There should be an option to classify the income.

[erchess]

Agree with Gretel

Client has an NOL - check it out on pg 8-15 of the 1040 TTB.

[Snaggletooth]

Capital Loss

Harvey, as reported, these people have an NOL. The 1120S has brought forward the loss on goodwill from the 4797, and a typical 4797 loss (gain) is classified as ordinary income on page 1 of 1120S.

Perhaps a better question would be whether the loss on the sale of goodwill is properly reported as a 4797 transaction. If it were on a schedule D, it would not be passed through as ordinary income(loss), but as a capital loss. This means there would be a $3000 ceiling on the taxpayer's net losses. Form 4797 is for property used in a trade or business, and I'm not sure goodwill is "property" at all but instead part of the purchase price of someone else's business. GAAP people may argue it is an intangible asset but it is clearly without substance other than perception of value.

If this is an NOL, however, the loss may not be "wasted." Check on how to carry the loss back 2 years.

UPDATE: Got curious and used the Small Business Web CD to look this up. In just a few minutes, I was able to determine that GoodWill is one of several Intangible Assets listed under Section 197. TTB SB05-18 gives the scoop on this. That means that Ordinary Loss treatment is proper, and this is a Form 4797 type transaction. Although it may be felt that this loss is "wasted", for most taxpayers offsetting ordinary income would be considered a windfall compared to creating a capital loss. Thanks Web CD!!

[JG EA]

Idea. Check to see if AMT is involved in any way.
Check to see if you have your setup for your tax program to figure the 2nd page of Form 1045 whenever it may apply.

[Harvey Lucas]

You guys are great!

TTB and this board are worth 10x the price I pay for TTB!!

Thank You

Harvey Lucas

[taxmom34]

harvey

ssshhhhh!! the price is a bargain already, we don't want to plant the idea of raising it.