After working backwards on the TurboTax Schedule E worksheet, I think I finally figured it out. There seem to be 3 categories of operating expenses on the Schedule E worksheet:
- Items that are 100% allocated to 2022 business (ie advertising, management expenses, other expenses)
- Items that are allocated in a split manner between business/personal with business portion 100% allocated to 2022 (ie taxes and mortgage interest).
- Items that are allocated in a split manner between business/personal with business portion only partially allocated to 2022 and the remaining put in column D as a "loss limitation" ultimately becoming a carryover loss for next year. Previous carryover losses appear to be included in this category.
It appears TurboTax solves to offset 100% of income by first using all of the first 2 categories above and then takes a percentage of the last category (including previous carryover losses) to exactly offset income and arrive at zero net income. Whatever remains from category 3 above becomes an operating carryover loss for next year (total of column D) .
Is the above method of allocating operating expenses determined by the IRS or is somewhat arbitrary and determined by TurboTax? I'm referring to the business allocation of 2022 expenses versus loss limitation expenses (columnb D), not business vs personal expenses.
