Disallowed SCorp Loss

[BHoffman]

Do I have to attach any statement when a taxpayer has disallowed Scorp losses due to distributions in excess of basis?

Thanks for advice

[dsi]

Do you prepare these returns using a computer program? The fact that you are asking the question suggests your are in the manual mode. Just curious.

[BOB W]

Do I have to attach any statement when a taxpayer has disallowed Scorp losses due to distributions in excess of basis?

Thanks for advice

Distribution in excess of basis will probably be taxable income. Check your reading material.

[S T]

Is it

Form 6198, at risk form?

Sandy

[BHoffman]

Bob - I misstated. The loss is because of bonus depreciation. He did take distributions in excess of basis as well and I entered that on Sch D as a short term capital gain.

Good question, Sandy. I'm stumped on when to use that form. So far, looks like no. I think I've filed that form before when I wasn't supposed to. Can't see what harm it does, though. Waiting to see if the shoe drops....but that's for another day

Dave, I prepare both the 1120S and the sole shareholder's 1040 using Drake software. I can export the K1 into the 1040. The program does not determine whether the loss is allowed or not.

In this case, the loss is disallowed. He had basis of only $200, ended up with a K1 ordinary loss for $12k. I'm wondering whether I just delete the loss on the K1 in Sch E2 1040 and make myself a note to enter it in "prior disallowed at risk losses" next year? Just like that, just poof?

I'm also really wondering whether I have to attach a shareholder's basis worksheet or something to the return, or if I just efile it without showing the loss on the K1 and with no explanation?

Whew! Thanks so very much for your kind advice.

[David1980]

6198 is the right form for this. What you'll want to do in Drake is on the K-1 input sheet on the individual return on the top right check the box "Some investment is NOT at risk" - this will generate a 6198. Since the basis is already at $0 Drake handles it just fine, no loss will carry to the Sch E pg 2 or 1040. If they still had some basis, you would enter it on 6198.

[BHoffman]

There is a discussion at the Drake forum going on now under "Drake Software Discussion" titled "S-Corp K-1 Loss with limited basis" and the consensus is not to file 6198. The participants are folks who are sharp. Hence, my angst

I've only prepared 2 returns with disallowed SCorp losses and used form 6198 on those.

David, I would love to take your advice. 6198 is a much easier way than deleting amounts on the K1 and writing up statements.

[David1980]

Wish I had access to the forum...

There are only two reasons I know of that a loss would not be allowed from an S-Corporation. 1) Passive activity rules, 2) at-risk limitation rules.

In this case where they have no basis, that would be #2.

I'm not sure how #2 can happen without there being amounts not at risk, which would trigger the requirement for 6198, so it would be educational to see the argument for not filing the 6198. It would also be interesting to see what the benefits of not filing are.

That said, it is a simple matter of getting the same result without 6198 - which you already suggested. With 6198 nothing will carry to Schedule E page 2. The K-1 does not get transmitted on an individual tax return. So simply delete the loss from the K-1. You should end up with Schedule E page 2 showing the activity name, EIN, and $0 loss. Or, if you have $200 basis (and thus $200 allowed loss) just make the loss on the K-1 input screen $200.

[BHoffman]

That's what I concluded too. No basis, no risk and that was how I saw it last year when filling out the form 6198 for those other 2 returns.

Thanks so much! I'm going to file good old form 6198.

[David1980]

http://www.taxalmanac.org/index.php/Basis_Limitation

Seems to offer good info on basis limitation as opposed to at-risk limitation. I've always considered at-risk/basis to be the same, but you know what... one of the reasons I read the forum is for education.

(I think for most returns the 6198 would still be required. The question in my mind would end up being "Why do they have no basis" and if it's because there are amounts not at risk the 6198 would still be required.)

[BHoffman]

Yes! I read that page today while researching. I'm pretty good at determining basis and limitations, it's the correct reporting that was confusing me.

If I'm reading the page correctly, my client had losses in excess of basis to report on form 6198, and distributions in excess of basis to be reported on Sch D. Right?

Thank you very much for your time and advice.

[iratax]

Why not elect out of the bonus deprecation and not have the loss. Then the deprecation is available next year.

[David1980]

Well, maybe.

IRS instructions for Schedule E indicate:

If you are a shareholder in an S corporation, your share of the corporation's aggregate losses and deductions (combined income, losses, and deductions) is generally limited to the adjusted basis of your corporate stock and any debt the corporation owes you. Any loss or deduction not allowed this year because of the basis limitation can be carried forward and deducted in a later year subject to the basis limitation for that year.

If you are claiming a deduction for your share of an aggregate loss, attach to your return a computation of the adjusted basis of your corporate stock and of any debt the corporation owes you. See the Schedule K-1 instructions for details.

So if claiming a deduction for loss, you would attach a computation of the adjusted basis. Though it does not say in what form that must be. If claiming the $200 loss to reduce basis to $0, it would seem this requirement is there.

In the Shareholder's Instructions for Schedule K-1 (1120S), there is a "Worksheet for Figuring a Shareholder's Stock Basis." - That would probably work for the computation of the basis.

It would seem that Form 6198 is still required, as long as there are amounts not at risk. From IRS 6198 instrucitons,

File Form 6198 if during the tax year you, a partnership in which you were a partner, or an S corporation in which you were a shareholder had any Amounts Not at Risk (see this page) invested in an at-risk activity (defined below) that incurred a loss.

Now if the adjusted basis & amount at risk are the same, my interpretation would be the simplified basis calc on the 6198 would satisfy the requirement for the computation of adjusted basis of the stock.

So I would say 6198 is probably required either way. I also think the 6198 meets the basis computation requirement unless the stock basis is different than the amount at risk.

Certainly interested in seeing other views on that though, so consider this a bump as well.

[BHoffman]

Why not elect out of the bonus deprecation and not have the loss. Then the deprecation is available next year.

You know, I thought about that but the client did not take any payroll and would have profits of around $30k. Doing it this way carries forward the disallowed loss to 2009.

His 2008 return shows no tax due even with the disallowed loss and the capital gain for the excess distribution, so I figured to just get this stuff off the books this year. He's anticipating a worse year for 2009, so maybe the loss carryforward will cover most of 2009 profit. If it's a good year, he'll take salary and is also looking to buy some new equipment.

[BHoffman]

David1980

I bit the bullet and called my old boss. They use Lacerte.

I don't think software is the end-all answer, but Lacerte does a lot of things automatically and I think their programmers generally stay on top of proper reporting.

He said Lacerte generates form 6198 when there are SCorp losses in excess of basis, and they file returns as Lacerte spits them out with no problems or questions and have been doing so for years.

So, at least it doesn't appear to do any harm to use form 6198.

I'm printing the return and getting ready to assemble it as we speak, with form 6198 attached and that, my friends, is the rest of the story

Thank you very, very much for your kind advice and support.