Subchapter S basis question and loss deduction

[Mr1040]

In this example a partner invests $30,000 cash in an S Corp. The first years K-1 for the partner shows on line one a loss of $170,000. It is my understanding that the partners deduction on his 1040 is limited to $30,000 which was his basis. Then his basis is reduced to zero and the balance of the loss, $140,000 is carried forward to be used as a deduction if and when the partners basis increases. That is the way I treated the loss on the partners return. Amounts are rounded off for simplification.

The next year the partners K-1 shows $25,000 as ordinary income on line one. Does the partner now get to use $25,000 of the balance of the $140,000 loss and thereby offsett the $25,000 ordinary income? If so, how it is reported, by a worksheet attached to the return? And then his basis would again become zero, correct?

Your help would be appreciated

Mr 1040

[veritas]

Your client will get to offset the 25,000 in earnings against the unused losses from prior year. However usually there are other adjustments which can affect the shareholder's basis. For instance tax free income and non deductible expenses.

Prior year losses allowed on sch e pg2 show up as aseperate line item with a description that escapes me right now.

What software are you using? Lacerte handles this scenario easily.

[Mr1040]

Getting closer but still studying

My software is Taxwise. I finally got through to someone at the IRS today. They agree that the loss is deductible up to the amount of his basis, as you also mentioned. My only question now is how to report it. Form 6198 or a worksheet. The gentleman at the IRS said to attach a worksheet, not form 6198.

[veritas]

If you have different loss components like 1231 and charitable contributions a ratio portion of each is applied to the 25,000 amount. So a worksheet can become a must.