Can surviving spouse use carry forwards (NOL, Capital, etc.) or are they lost?

[Hamacher]

I have a client whose husband passed away. There are a number of carry forward items that were generated by the deceased tax payers solely owned S Corporations. Does she get to claim the carry forward items on her tax returns or do they get lost upon her husband’s death?

Thanks in advance for the help.

[oceanlovin'ea]

one year

For the year that the person died, it will still be a joint return and the losses can be carried forward.

What happens to the S corp upon the death of this person? Spouse might be beneficiary and thus get right to losses.

I have a elderly couple that are carrying forward a LARGE capital loss. I told wife and daughter that if he dies, she will only get to carry forward 1/2 of the losses. The losses are considered jointly owned. So I suggested that they talk to their investment advisor about selling some stock with significant gains and reducing the carry forward amount.

Losses from an S corp might be different but I would not think that spouse could carry forward the entire losses for that either, if any of the losses.

Linda, EA

[Burke]

S Corp might be solely owned by one person, but could have another person as officer (such as Vice-President) to handle anything left undone. Corp exists until it is terminated formally. It is a separate entity and one reason a corporation is formed. An executor possibly could keep it open to wind up affairs or receive income. If it is a type of business which requires a license, such as real estate, the license can be kept active by the executor for 6 mos (in my state) to take care of pending sales and other outstanding business. The will may state who receives the shares of the Corp, so they may have passed to the spouse who may now be the owner. If it does not, they should be an asset of the estate. Is she executor?

[Lion]

I think OP was asking about the losses that had already passed through from the 1020S to the 1040.

I think HIS losses die with him, but have not had the situation to research that. Do let us know what you learn.

[Hamacher]

I think OP was asking about the losses that had already passed through from the 1020S to the 1040.

I think HIS losses die with him, but have not had the situation to research that. Do let us know what you learn.

Correct... I'm wondering about the losses already pass through on their individual return.

Anyone else dealt with this?

[Burke]

Since you used the term "carryforward" for the losses, I am assuming you mean NOL's. They would be applied to the final return of the deceased, who files jointly with his spouse in the year of death, and nothing would carry forward for the spouse to use in the following year if it was his solely owned Scorp.

[Nashville]

Double Wickets

As so often is the case with an S corp, the survival of anything has to roll the croquet ball through double wickets. First, assuming it is the corporation that had the loss, the corporation must first deal with it before passing it through. If the corporation leaves anything on the table and the corporation terminates without perpetuity, what is left on the table is lost into oblivion.

After that, then whatever is available from the taxpayers' K-1 becomes fodder for his personal return. Most likely if the NOL is simply absorbed into ordinary income, the "benefit" is taken by the taxpayer in the form of reduced income and the NOL loses its character.

If his wife or other beneficiaries owned any part of the corporation, and they are able to keep the corporation viable for a few years, then they can participate in the benefits from the NOL.

[Bees Knees]

From TTB, page 6-10:

Death of taxpayer. Capital losses cannot be carried over after a
taxpayer’s death. They are deductible only on the final income tax
return filed on the decedent’s behalf. The annual $3,000 ($1,500
MFS) limit still applies in this situation. Even if the loss is greater
than the limit, the decedent’s estate cannot deduct the difference
or carry it over to following years.

From TTB, page 8-17:

Change in marital status. If a taxpayer and spouse were not
married to each other in all years involved in figuring NOL carrybacks
and carryovers, only the spouse who had the loss can take
the NOL deduction. If a joint return is filed for the NOL year,
the NOL deduction is limited to the income of that spouse. For
example, if marital status changed because of death or divorce,
and the taxpayer has an NOL in a later year, carry back the loss
only to the part of the income reported on the joint return filed
with the former spouse that was related to the taxpayer’s taxable
income. After deducting the NOL in the carryback year, the joint
rates apply to the resulting taxable income.

There is nothing that allows for the surviving spouse to claim a capital loss or NOL in a year following the death of his/her spouse if the capital loss or NOL originated with the decedent. Both losses end on the final return of the decedent and any un-used carry forward loss is lost. However, if the surviving spouse were a joint owner of the property producing the loss, the surviving spouse can continue to carry forward his/her share of that loss.

[Bees Knees]

It should be noted that the original poster was talking about capital losses or NOLs that were produced in prior years, and those losses were not absorbed in the prior year of the loss, thus, they are carried forward to future years. Thus, the current S corporation status is irrelevant. A capital loss carry forward and an NOL carry forward are the result of losses produced in prior years by the S corporation when its owner was still alive. Thus, unless the surviving spouse were part owner of that S corporation in the prior year that produced the losses, the fact that the surviving spouse may have inherited the S corporation stock in the year of death is irrelevant.

It should also be noted that the seemingly unfairness of losing losses after the death of a taxpayer is not unique. NOL carry forwards can only go on for 20 years. If the taxpayer still cannot use the NOL after 20 years, its gone, regardless of whether or not the taxpayer is still alive. Deductions for charitable contributions that exceed the AGI limits are carried forward for up to 5 years. If not used up after 5 years, they are lost. C corporations can only carry forward their un-used capital losses for up to 5 years, after which they go off into oblivion as well. No adjustment to basis is made for an unused carry forward loss that goes away. They simply just go away.

[Maribeth]

Where does the surviving spouse live? In a community property state, then 1/2 of the carryforwards are hers and she will be able to carry those forward if unused.

[Hamacher]

Michigan

Where does the surviving spouse live? In a community property state, then 1/2 of the carryforwards are hers and she will be able to carry those forward if unused.

She lives in Michigan.