Form 7203 is not prompted for claiming an S-Corp loss not allowed in prior year due to basis limitation

[erinpatrickhourani]

I am using both Turbo Tax online and Turbo Tax Home and Business to try to file my taxes.  I would like to claim an S-Corp loss that was not allowed in a prior year due to basis limitations.  Per the IRS instructions, this requires the use of Form 7203 and Question 27 on Schedule E will need to be checked "yes" prompting additional instructions for Schedule E (since K1 values and Schedule E values will be different).   

During the interview portions of both platforms, there is a question about claiming losses not allowed in prior years due to basis limitations.  However, if you check "yes," Form 7203 is NOT prompted in order to input carryover amounts from prior years to determine the allowable loss from stock basis.  

On the Turbo Tax Home and Business platform, I am able to manually retrieve Form 7203 and input the correct values, but it does not link with Schedule E, so the values on Schedule E are incorrect.  I have tried to manually override Schedule E (more specifically Question 28 to input "PYA" and the non passive loss allowed as per IRS instructions), but now the system keeps telling me there is an error, and I cannot e-file the taxes without removing the overridden material.  

Please advise!!! I have spent hours trying to get this right, and I believe it is a bug with the programming and not something I am doing wrong.  The form has only been required by the IRS for two years now and I think Turbo Tax needs to update the programs.  

[AliciaP1]

It would be helpful to have a TurboTax ".tax2022" file that is experiencing this issue.

You can send us a “diagnostic” file that has your “numbers” but not your personal information.  If you would like to do this, here are the instructions: 

Go to the black panel on the top of your screen and select Online. 

1. Scroll down to and select Send tax file to Agent. 
2. You will see a message explaining what the diagnostic copy is.  Click send through this screen and then you will get a Token number. 
3. Reply to this thread with your Token number. This will allow us to open a copy of your return without seeing any personal information.  

We will then be able to see exactly what you are seeing and we can determine what exactly is going on in your return and provide you with a resolution.

@erinpatrickhourani 

[erinpatrickhourani]

Thank you.

In Online Turbo Tax Premium, the token is 1119555.  I cannot access Form 7203 in this version, even though I think it should be triggered from the interview response. 

In the Home and Business version, the token is 1119605.  I can access Form 7203, but it doesn't affect any input on Schedule E or allow me to input the prior carryover loss from basis limitation. 

[AliciaP1]

Upon review, Form 7203 is not required in your case and is not the form used to report the loss carryover.  

Per the IRS:

Form 7203 is filed by S corporation shareholders who: 

• Are claiming a deduction for their share of an aggregate loss from an S corporation (including an aggregate loss not allowed last year because of basis limitations),

 • Received a non-dividend distribution from an S corporation, 

• Disposed of stock in an S corporation (whether or not gain is recognized), or 

• Received a loan repayment from an S corporation. 

Since the loss is a carryover and the current year net will still be a profit, you do not need Form 7203.  You do need to mark that you have "at-risk carryovers from 2021" to correctly take the deduction in 2022. 

To do this in TurboTax Premium you can follow these steps: 

1. Sign in to your TurboTax
2. Open or continue  your return
   • Choose a section from the TurboTax menu and select Pick up where you left off
3. Using the search bar, type K-1 and select the Jump to link from the search results
   • Note: If the Jump to link doesn’t work, select the Federal tab, then under S-corps, Partnerships, and Trusts, select Wages & Income
   • Select Revisit or Start next to Schedule K-1
4. Answer Yes to Do you want to review Schedules K-1 or Q? and follow the prompts until you get to the Other Situations screen
5. In addition to the boxes you have already marked, also mark I have at-risk losses carrying over from 2021.
6. Then enter your NOL from the basis limitation in 2021, your AMT loss (same as the NOL), and your QBI loss carryover from your 2021 returns.

@erinpatrickhourani 

[erinpatrickhourani]

Thank you for your explanation, but I still do not understand.  I do not have at risk losses carrying over from last year, so why would I check this box?  I do have losses that were previously not allowed due to basis limitations that I would like to claim now that I have restored basis.  How do I do this?  I thought this was through the use of Form 7203 to determine the allowable loss from stock basis.

I understand that I may not have to submit Form 7203, but I believe I should still use it since it replaces the old worksheet used to calculate basis.  

But maybe I am misunderstanding something.  Is "an aggregate loss not allowed last year because of basis limitations" different from the "carryover amounts (column (e)) from the previous year" which is found on Form 7203 Part III Column B? But if those definitions are the same thing, then it seems I would have to submit Form 7203.

 This is from IRS instructions for Schedule E Part 2.  Can you please help me understand what I am missing, because it seems like this does apply to my situation?

The basis of your stock is generally figured at the end of the corporation's tax year. Any losses and deductions not allowed this year because of the basis limit can be carried forward indefinitely and deduc- ted in a later year subject to the basis limit for that year. To figure your aggre- gated stock basis, you can generally use Form 7203. For more details on the ba- sis rules for S corporations, see the In- structions for Form 7203.

If you are claiming a deduction for your share of an aggregate loss (or you

receive a distribution, dispose of stock, or receive a loan repayment from an S corporation), check the box on the ap- propriate line in Part III, column (e), and attach Form 7203 to your return.

If you had a loss from an S corpora- tion that was not allowed last year be- cause of the basis rules, but all or part is allowed this year, see Line 27, later, for how to report it.

Line 27

If you answered “Yes” on line 27, fol- low the instructions below. If you do not follow these instructions, the IRS may send you a notice of additional tax due because the amounts reported by the partnership or S corporation on Sched- ule K-1 do not match the amounts you reported on your tax return.

Losses Not Allowed in Prior Years Due to the Basis or At-Risk Rules

Enter your total prior year unal- lowed losses that are now deductible on a separate line in column (i) of line 28. Do not combine these losses with, or net them against, any current year amounts from the partnership or S corporation.

Enter “PYA” in column (a) of the same line.

Thank you for your help!

[AliciaP1 · Accepted solution]

Your investment in the stock of the S-Corp is either at-risk or guaranteed.

Per the IRS:

At-Risk Amounts

You’re at risk in any activity for:

1. The money and adjusted basis of property you contribute to the activity, and
2. Amounts you borrow for use in the activity if:
   • You’re personally liable for repayment, or
   • You pledge property (other than property used in the activity) as security for the loan

Most investments are at-risk because there is no guarantee they will get their investment back.  So, your basis limitation loss is an at-risk loss carryover.  Follow the steps I outlined to report your loss carryover and apply it to 2022.

@erinpatrickhourani