S-Corp Limitations

[Melissa]

I don't have the opportunity to prepare many returns for S-Corp shareholders so my insight into this area of tax law is quite limited. I have done extensive reading on the basis, at-risk and passive limitations, however, I'm still feeling a little confused. If an S-Corp shareholder's losses are always limited first by his/her basis (stock or loan) and carried forward then when is there opportunity to apply the additional at-risk or passive limits? Would these apply only in the year the taxpayer disposes of his/her interest?

Again, thanks for any and all help.

[kathyc2]

If there is a profit in future year, the taxable portion is reduced by the carry-forward disallowed loss, either from passive or at risk limitations.

[Melissa]

The way I understood the wording, is that if a loss is more than basis, that loss is limited in the year of the loss by the basis of the shareholder. Is that correct? That loss would be carried forward to the next tax year or is that loss allowed to reduce other income in the year of the loss? I don't understand why basis would be reduced by loss unless income is being offset somewhere. If that loss is allowed to go on to reduce other income then I can understand where the at-risk and passive limitations come in to play. If on the other hand it is carried forward due to the basis limitation, then at-risk or passive would only be limiting the loss in the year of a disposal (unless it's a taxable disposal).