Schedule C Net Profit shows as 0 with PAL next to it, even though I earned a profit

[asherbert1]

1) From looking at the 2-year Schedule C comparison report it shows that I had Passive suspended losses last year that negated my profit this year. I have always marked that I am materially participating in my business, so just want to make sure that carrying over the loss from last year is not a problem.  I'm actively involved, so the use of PAL concerns me.

2) For my Ohio state taxes does this PAL apply or do I report the actual profit? I would think that the profit should be the same on both federal and state, but just not sure about the use of PAL.

[AliciaP1]

If you materially participated both this year and last, you should not have passive activity losses (PAL) that are offsetting your active income unless you are in the rental property business but do not have a real estate license.  If this is the case, your business activities are still passive and not eligible to offset active income.  It can, however, carry forward and offset other passive income.

See PAL from the IRS for more information.

[asherbert1]

I find it odd that Turbotax automatically does this then.  Is this a bug that I should talk with them about? Turtbotax automatically took losses from last year that I couldn't claim and applied them to this year and put the PAL on line 31 of Schedule C.

[asherbert1]

Forgot to say thanks for your answer!

[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: 

In TurboTax Online, go to the black panel on the left side of your program and select Tax Tools. 

1. Then select Tools below Tax Tools. 
2. A window will pop up which says Tools Center.  
3. On this screen, select Share my file with Agent. 
4. You will see a message explaining what the diagnostic copy is.  Click okay through this screen and then you will get a Token number. 

In TurboTax CD/Download versions, 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. 

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.

@asherbert1 

[asherbert1]

Thank you for looking into this.  My token is 1085431.

I went and read the info from the IRS in the link you provided, and what they say is what you advised in your response.  It sounds like I should delete Form 8582 p1-p2 and get rid of the PAL on Schedule C.  I'm guessing I need to manually update those numbers on the form to get the correct totals since Turbotax is automatically doing the PAL.  I've always marked my business as Materially Participated.

Is this the best approach to fix this?

Thanks!

[AliciaP1 · Accepted solution]

Somehow your 2021 Schedule C income got marked as passive activity.  You will need to amend your 2021 return to remove the PAL and recognize last year's loss.  You can remove the losses from this year's return so you can continue filing your 2022 tax returns and go back and amend your 2021 at your convenience.

To change this in TurboTax Home & Business you can follow these steps:

1. Within your tax return, under the Business tab and Business Income and Expenses click I'll choose what I work on
2. Click Update for Profit or Loss from Business under the Business Income and Expenses section
3. Click Edit for your business
4. Scroll down to Special Situations under the Final Details section and click Update
5. Click Continue
6. On the Let's get your at-risk loss carryovers screen, delete the amounts in both columns and Continue
7. Scroll down to Special Situations under the Final Details section and click Update (yes, again!)
8. Uncheck I have passive activity losses carrying over from 2021
9. Check None of the above and Continue
10. Proceed entering/reviewing your return.

@asherbert1 

[asherbert1]

Thanks for your detailed response.  I followed all of the instructions and it overrides when I put "None of the above" in the Special situations section and continues to checkmark the "I have passive activity losses".

I've hit save immediately after marking none of the above and when I hit continue it changes it back.

Thoughts? perhaps I should just 0 out the carryovers

****** NEVER MIND ****** 

When I 0'rd out the carryovers and went back in it fixed the numbers (not the checkmark), but that's ok I guess, right?

Now I need to go learn about paying Self Employment Tax

[asherbert1]

Alicia, I was thinking about this and wondering if that check mark has been checked for the past several years.  Let me explain, before 2019 I used to sell some of my stained glass occasionally, so I reported that as Hobby income, which meant that none of my expenses were deductible, so I'm betting TurboTax continued to roll the check mark for passive income forward each year and I just wasn't aware of it.  2022 is the first time I have made a profit since officially starting my business in late 2019.

I'm wondering if the program can be modified to check to see if the person marked that they "Materially participated in the business" and then show an alert for carrying forward a passive income deduction. This will alert the person to this issue.

Thanks for your help - really appreciate it!  Anne

[asherbert1]

Sorry to be sending you another question.

1) So my form 8960 line 4a shows Rental real estate, royalties.... as $1199, and then subtracts that out in 4b. I don't think anything should be in these boxes since I don't have passive income. The net result is 0, but I can't remove it from the form. Perhaps this is occurring because the system will not delete the check mark for passive activity losses carried over from 2021.

2) Also line 5a on 8960 shows a net gain from the disposition of property (and this also shows up on the 1040 line 7 (capital gain).  I didn't sell any stock this year, so where is it pulling this information from? Is this coming over from previous years?

@AliciaP1 

[RobertB4444]

Sounds like you're still having issues from the passive activity problem from last year.  The fix is easy - but you're not going to like it.

Delete your 2022 return.  Delete it entirely.  Then go back and amend the 2021 return.  Get that return fixed and all the passive activity closed out.  Then go in and roll that return forward into 2022 and start your 2022 return fresh.  You'll lose all the work you've done so far but you'll save yourself a lot of headaches.

@asherbert1