Suspended loss from S- Corp

[Kram BergGold]

Client has a large suspended loss from 2011. In 2012 there will be a loss on line 1 and a capital gain from the sale of the business which will be greater than the two losses combined. Obviously, if the business is concluded and this is the last K-1 both years losses will be allowed. What if this is not the final K-1. Will the capital gain be portfolio and therefore losses not allowed or will it be passive and therefore the losses will be allowed?

[DMICPA]

Suspended Loss recognition

As I recall, the passive loss would be realized when the underlying passive activity is sold or disposed of. If the passive activity is just one componant of the business, it would seem that when the passive loss activity is terminated, the loss would be recognized. For example, if a business has an active activity and a passive activity, when the passive activity is disposed of the active part of the business continues. The loss on the passive activity would be recognized.

You could revisit the passive loss rules to see if they have any useful information.

Hope this helps.

Bob

[Roland Slugg]

When a passive activity is completely disposed of, in a taxable transaction, both its current year and prior year suspended losses are deductible in the year of the disposition. If there are additional losses (or gains) in subsequent years, they are considered to be attributed to a "former" passive activity, and, thus, are deductible (or taxable) in those later years.

[DMICPA]

Roland

So how can you have additional passive losses if the passive activity is disposed of?

If you completely dispose of a passive activity in a taxable transaction, how can there be additional passive losses in a subsequent year?
Especially from this particular passive activity which has been disposed?

Are you saying that if there are still passive activities from other non-disposed activities these would be carried forward?

??????

[Roland Slugg]

So how can you have additional passive losses if the passive activity is disposed of?

Easy, and it happens all the time ... especially by cash basis taxpayers. An activity is disposed of, and the following year ... or two or three years ... income is received and/or expenses are paid by or on behalf of the activity that was sold.


Btw, it is better to type something related to the subject, or nothing at all, in the "Title" line when posting or replying to a post. A person's name is not helpful.

[DMICPA]

OK, I get it

When a passive activity is completely disposed of, in a taxable transaction, both its current year and prior year suspended losses are deductible in the year of the disposition. If there are additional losses (or gains) in subsequent years, they are considered to be attributed to a "former" passive activity, and, thus, are deductible (or taxable) in those later years.

Dear Roland: What you are saying is that if a passive activity is sold and there happens to be additonal costs that occur in the next taxable year that relate to the passive activity that was previously disposed of, these costs would be considered to be fully deductible in the year that the costs are incurred for this purpose.

In other words, the costs of the former disposed passive activity are considered active for this purpose.

Normally I would try to get all the costs of the passive activity to occur in the year of sale.

Thanks for your prompt reply

[DaveinTexas]

I read this post a bit differently than

Client has a large suspended loss from 2011. In 2012 there will be a loss on line 1 and a capital gain from the sale of the business which will be greater than the two losses combined. Obviously, if the business is concluded and this is the last K-1 both years losses will be allowed. What if this is not the final K-1. Will the capital gain be portfolio and therefore losses not allowed or will it be passive and therefore the losses will be allowed?

The other commenters. Kramer stated there were suspended losses, not passive losses. Meaning (my assumption) that the shareholder can't take the losses due to his basis being reduced to zero. If this is the case then the losses are lost and per IRS, "If a shareholder sells their stock, suspended losses due to basis limitations are lost. Any gain on the sale of the stock does not increase the shareholder's stock basis. A stock basis computation should be reviewed in the year stock is sold or disposed of."

Passive losses would be realized in the final year, if the shareholder had sufficient basis, but suspended losses are losses that the shareholder did not have sufficient basis to take in the year of the loss. These losses are not released upon the sale, even a fully taxable sale because the gain from the sale doe not increase his basis.

I hope that makes sense, sorry I can't seem to track down the code section, it is pancake and bacon time!