I have spent hours working with the TurboTax reporting of S-Corp loss limitation interactions (admittedly a very complicated area of tax law--like most). I have not tested every possible situation, but I believe I have discovered the major problems a lot of users are having with this (many posts on this over the last few years), and solutions that TurboTax developers could change to fix it.
I have a situation with two consecutive years of S-Corp passive losses, the first year of which eliminated the stock basis (and no debt basis). In the second year (2023) I finally determined that I filled in the forms for the first year (2022) incorrectly; although the 2022 tax calculation was ultimately correct, Form 6198 was not completed and the proper non-allowable amounts did not carryover to 2023, causing a lot of confusion.
The problems and fixes:
1. The IRS instructions for the various rules and forms (K-1, 7203, 6198, 8582, and QBI) are certainly not easy to understand by the lay person, are disjointed and not well laid out. However,
2. The tax experts at TurboTax have not done anywhere near an adequate job of guidance in the interview sections of the application. The questions asked about All investment at risk and at-risk loss carryovers should be explained more clearly and completely, not just links to IRS verbiage, with guidance on how to answer them. Particularly explaining the connection with the basis limitation and the fact that if stock basis is zero one does have an at-risk loss limitation. If a loss wipes out the stock basis (determined on Form 7203), one must NOT check the box for the "ALL my investment in this activity is at risk. It is not at risk if the stock basis is zero! Also, if there is an at-risk limited amount, it should not be reported as a passive loss on Form 8582--it is carried over to the future to be reported when the loss becomes allowed under the basis and at-risk rules. No where that I can find is this connection made in the IRS instructions or TurboTax interview. If this box is checked, relevant follow-up questions in the interview will not appear and the unallowed loss will show up as a passive loss on Form 8582, potentially doubling up the passive loss eventually. Also, in the following year, the box in front of "I have at-risk losses carrying over..." MUST be checked to pick up this carryover.
3. The programmers could also make this process easier by integrating the forms better, especially 7203. Why can't this form be completed from the interview? Or at least explained better than just throwing it up in the interview with no guidance on how to complete it. It is a quite confusing form and not easy to complete manually.
I hope this is helpful and will be taken into consideration by TurboTax to make improvements.
