S Corp Loss Recapture

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Per Pub 925, the recapture rule states that "If the amount you have at risk in any activity at the end of any tax year is less than zero, you must recapture at least part of your previously allowed losses." I have a client who had a $12,000 loss in 2010 just barely covered by stock and loan basis. For 2011 they have another $14,000 in losses not covered at all (except for about $300). Per the IRS Pub 925, I need to recapture last year's loss. Does anyone know where or how this is done? I'm guessing the Schedule E but can't find written instruction anywhere.

[Roland Slugg]

My reading of your post suggests that you are confusing "at-risk" and "basis." They are not the same thing ... at all.

If you really have an at-risk situation, figure the limitation on F-6198.

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at risk vs basis

My understanding is that if you have absolutely no basis left in the corp, there is no longer any investment at risk. Is that not correct? I am reporting the suspended loss on a 6198.
The Recapture Rule I quoted from Pub 925 says I must recapture any previous years losses claimed but does not state how or where to report it.

[Gretel]

My understanding is that if you have absolutely no basis left in the corp, there is no longer any investment at risk. Is that not correct?
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No, it is not. You can have bank loans that usually do not increase basis but you can be sure they put the shareholder at risk.

[Bees Knees]

My understanding is that if you have absolutely no basis left in the corp, there is no longer any investment at risk. Is that not correct? I am reporting the suspended loss on a 6198.
The Recapture Rule I quoted from Pub 925 says I must recapture any previous years losses claimed but does not state how or where to report it.

You don't have to recapture the previous year losses unless the money you used in prior years to deduct a loss are no longer at risk.

For example. Your basis in a business activity is zero. You take out a $10,000 loan from a bank and contribute that money to the business, which increases your basis in the business to $10,000. You are at risk for that loan because the bank requires you to pay it back. Now assume the business has a $10,000 loss for the year. You deduct that loss, which decreases your basis in the business down to zero. In the following year, the bank relieves you of the liability for the debt by converting your loan from a recourse debt into a nonrecourse debt. Since you are no longer at-risk for the $10,000 loan, your at-risk basis in the business is decreased to negative $10,000. You now have to recapture the previously allowed losses in the business because you are no longer at-risk for the money you used as basis for deducting those losses.

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Thanks Bees Knees & Everyone

Both the stock and loan basis are gone. The 2 shareholder loan balances were depleted with last years loss taken against them. This year, to stay in business, they borrowed from their business line of credit. The business line of credit was established years ago and they are not personally liable. I had them verify that with the bank. So, with those facts, I've suspended this years loss using Form 6198. Now, if I'm reading Pub 925 Recapture Rules correctly, I have to recapture the loss they took last year. The amount to recapture being the lower of the previous years losses taken (going all the back to 1978) or the amount of negative retained earnings the corp has due to this years loss.

If I have that right, where do I recapture the previous year loss?

Bees Knees, I found a post from you from a few years back that mentioned the Schedule E with the description "at risk recapture" for the amount included in this years income. Would the above scenario I described warrant handling it this way?