S Corp loss carryover

[luckyaces09]

Hello,

At the end of 2020, my S Corp had a negative balance on its M2.

Would I carry over that over to my 2021 1040 in line 5 other income and report it as negative?

If so, would this negative balance be considered a "Prior year losses which you were not allowed to deduct due to the application of the passive activity loss rules" on the K1?

Thank you 

[Rick19744 · Accepted solution]

A few comments on your question:

• The Sch M-2, also known as AAA, tracks S corporation income and losses that have been passed out to the shareholders.
• Your AAA can be negative, but only as a result of losses.  Distributions cannot reduce the AAA below zero
• So make sure your AAA is accurate; by making sure that distributions did not contribute to the negative figure
• Your first question, "yes" the balance at the end of one year carries over to the beginning of the next year
• Your second question, "no" the negative balance in the AAA column does not represent prior losses which may have been disallowed.  These are entity level losses.  Any losses that are disallowed as a result of basis, at-risk, or passive activity rules is handled at the shareholder level.

[luckyaces09]

Would the negative balance from the prior year be transfered over to the 1040 line 5? If not, where would it be reported?

[AliciaP1]

You only input your K-1 received from the S-Corp into your personal return.  The other schedules on your 1120S populate the K-1 according to the ownership of the company.

To enter your K-1 into TurboTax please follow these steps:

1. Sign in and open your return by selecting Pick up where you left off under a section.
2. Search for K-1 and select the Jump to link at the top of the search results.
3. This will take you to the Schedules K-1 or Q screen.
4. Answer Yes and follow the prompts. You may be prompted to upgrade to Premier, if you're not already using it.
5. We’ll ask some questions about your K-1, and then you’ll enter the data from the form.

[luckyaces09]

Thank you. How would I handle the loss from the previous year on the m2? Would I deduct that from the current years 1040?

[AliciaP1]

The M2 is a schedule for the business return only.  It does not translate to your personal return at all.  You ONLY enter the information from your K-1 on your personal return.

Follow the guidance to enter your K-1 to your personal (1040) return.

@luckyaces09

[luckyaces09]

Sorry I got my forms confused... if I had a loss on previous year M2 would I report it as negative on the 1120-s under "other income" line 5?

Thank you!!

[Rick19744]

No.  This "negative" (technically a loss), has already been accounted for both on the entity side and your personal tax return.

Your share of any loss would have been reported on your K-1, which would have been input into TT.

[AliciaP1]

No, your losses for the business roll into retained earnings and zero out each year.  The M2 is a current year report of equity which includes retained earnings.  The beginning balance on the M2 already contains prior year losses.

@luckyaces09