There are several concerns that arise from this that we should address separately.
- Stock and Debt Basis Losses: The K-1 typically reports stock basis losses as long-term capital losses, but debt basis losses may not flow directly to the K-1 as a combined total. This is because debt basis adjustments are treated separately and may require manual reporting on your personal return.
- Codes for Line 16 and Line 17: If none of the codes seem appropriate for reporting debt basis losses, it might be necessary to consult IRS instructions for Form 1120S to ensure proper reporting.
Reporting Debt Basis Reduction on 1040
- Schedule D: Reduction in debt basis is generally reported as a long-term capital loss on Schedule D, provided the debt qualifies as a capital asset. Please read this article to help you determine if your debt is a security.
- Schedule E or Schedule 1: Since there was no rental activity or income, reporting on Schedule E is not appropriate. Schedule 1 could be used for adjustments to income, but this depends on the nature of the debt and its classification.
Real Estate Professional Status
If you had no rental activity or income last year, it may be challenging to maintain real estate professional status. This status typically requires material participation in rental activities, which doesn't seem applicable in your case.
QBI Carryover Loss
Net Operating Loss (NOL): QBI losses can only offset future QBI income, not W-2 income or other types of income. If the loss is showing as an NOL on Schedule 1, it might be a mistake. You may need to adjust this manually or consult with a tax professional to help ensure compliance.
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