K-1 incorrect loss on Schedule E

[Doc99]

I'm confused about why my K-1 S Corp losses are being brought forward to Schedule E. My stock basis is 0 and there is no debit basis. I have a loss from the current year and a carryover lass from prior year. Both are being brought forward to Schedule E line 28 column (i) as separate items.

Form 6198 has the sum of both losses on line 5. Part II has 0 on line 10b

.

The At Risk Wks S has the current years loss and the carryover loss on A line 1.1. The sum of the losses are in the Allowed column and carries through to A line 8.

Form 7203 is correct and shows the sum of the current year and prior year as carryover losses.

I tried overriding the allowed column on the At Risk Wks S A line 1.1 and forced it to 0. This changed Schedule E line 28. The entry for the carryover loss is still present in 28(i). The entry for the current year now has a value equal to the carryover loss from the prior year in 28(k) income column. The net effect is that a 0 loss is on Schedule E.

This raises a couple of questions.

After overriding the allowed losses on the At Risk WKS A, why does Schedule E handle the prior years losses in th way it did?

Why isn't TurboTax disallowing the loss in the first place?

[Rick19744]

This is an area that TT needs taxpayer input as TT does not maintain your basis schedule.

I would not override the loss.  Too many issues with doing so.

What you need to do is find out where form 6198 Part II line 6 is driven from.  Once you do, you need to input zero on this line.  Appears that since line 10b is correct, this should have resolved the issue.

The next item I would look for is to make sure the form 6198 is linked to that specific K-1.  Can't tell you how to accomplish that, but it does need to be linked for the software to properly handle the at-risk limitation.

If the above doesn't resolve the issue, reply and I will use a  "phone a friend" helpline.

[Doc99]

Thank you for your suggestions. I'll dig into it again this weekend. 

[Doc99]

Still not clear

Form 6198: Part II line 6 is 0. Part IV lines 20 &  21, Amount at risk and Deductible loss are 0. 

Maybe I'm supposed to override the loss on line 1 of Section A, Passive Activity Adjustment  to Income or Loss, of the K-1 S form. Doing that does zero out the loss on Schedule E, Part II line 32. It still does it in an odd way on Schedule E, Part II line 28.

What I call an odd way on Sch E, Part II line 28 is this:

The S Corp name is listed on one row with the carryover loss from last year in the income column k.

PYA is listed on the next row with the carryover loss from last year in the loss column i. 

The net effect is to not allow a loss for the tax year. It just looks strange.  

[Rick19744]

Follow-up responses:

• I agree with you in that overriding the loss on line 1 as you have done will work, but I am not a fan of overrides.  This may preclude you from efiling.
• Additionally, by doing this, I am also concerned that TT will not track your carryover losses correctly.
• Did you not see the ability to link the form 6198 to the K-1?
• I will tag a lifeline as @tagteam may understand how the software works in this area.

[tagteam]

Re linking the 6198 to the K-1, that is accomplished automatically by the program (for every K-1 created, there is a 6198 attached, as needed, to the K-1 as you can see in Forms Mode).

[tagteam]

Also, I believe the figure on Line 1 of the 6198 should include an amount that was transferred in from a prior year return. Although I cannot test that, at the moment, I would not override that figure since doing so would, indeed, prevent e-filing the return.

Note that you can make entries in Forms Mode directly on the K-1 at-risk allocation worksheet as well as on Form 6198 itself (in most instances without having to resort to an override).

[Doc99]

Thank you. I appreciate all the input.

Form 6198 is indented under the K-1 S in the forms list.
I went into the filing section and it does still offer to efile.

I previously tried overriding the Allowed Loss on the Schedule K-1 At-Risk Limitation Allocation Worksheet. That has the same effect as overriding the loss on line 1 of Section A, Passive Activity Adjustment to Income or Loss, of the K-1 S form. Is one method better than the other?

I'm still curious as to why both methods tried have what looks to be odd entries on Schedule E. The net effect is that no loss is applied on Schedule E. It just looks odd that TT made two entries in that manner.

[AmeliesUncle]

Form 6198 shouldn't even be part of the return.

Form 6198 is for At-Risk losses, not Basis losses.    At-Risk losses come AFTER Basis losses, so if you are limited by Basis, form 6198 should not be part of your tax return.  I know Rick disagrees with this, but it is a fact that At-Risk comes AFTER Basis, so 6198 should not be filed.

TurboTax is severely deficient by not assisting you with Basis losses.

[tagteam]

There are ordering rules and basis is most certainly applied before the at-risk rules.

I believe the confusion arises because both rules, in a sense, prevent a taxpayer from recognizing "phantom losses" but the at-risk rules were enacted for a different reason (e.g., tax shelters).

[Rick19744]

To be clear, I do not disagree that at-risk comes after basis in the ordering rules of loss limitations. 

However, in order to get tax software packages to handle the limitation correctly and track disallowed losses, form 6198 is used.

If your tax return is being completed by a tax professional who has the understanding and ability to track suspended losses independently and can use overrides and still be able to efile; that is a different story.

Additionally, in the S corporation context, basis and at-risk are pretty much identical; hence using the form 6198 accomplishes the task and arrives at the correct result.

A snippet from the form 6198 instructions:

File Form 6198 if during the tax year you, a partnership in which you were a partner, or an S corporation in which you were a shareholder had any amounts not at risk .

Clearly an S corporation shareholder who has no basis, also has no at-risk and using form 6198 accomplishes the task and the taxpayer files an accurate tax return.

[AmeliesUncle]

I agree that it can be used as a worksheet to help figure out the amounts, but it should not be filed.

By filing Form 6198 you are stating the losses are limited based on the At-Risk rules, which is incorrect.

Hopefully, at some point in time Intuit will get on the ball and have Form 7303 automatically limit things.