The "disallowance" happens on your personal return and affects your basis - not from the business side. When you calculate your first year's basis the ending, after the income or loss that was reported on your K-1, as well as any distributions reported, will add to or reduce your basis. If your basis gets reduced below the amount of the loss or distribution reported in a future year and you do not make any contributions to increase your basis, your losses are now disallowed and become carryover losses until your basis is raised enough to take the losses.
For example:
- If your initial stock purchase was $10,000 and your first year K-1 reported a $5,000 loss, your ending basis is $5,000, and, ignoring any other income/loss on your personal return, your full loss is allowed.
- In the second year, your K-1 reported a $7,000 loss with no contributions or additional stock purchases, you can only claim $5,000 of loss for the year because of your basis limitation. You now have a $2,000 loss carryover.
- In the third year, you contribute $5,000 and the K-1 reports a $10,000 income, your loss carryover is taken and your ending basis is $13,000. Your K-1 income is reported as the $10,000 on your personal return and you recognize the carryover loss of $2,000 for net business income of $8,000.
@yoadrienne6
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