You should report the Schedule K-1 exactly as it was prepared, to include any information about your basis.
In order for an S-Corp shareholder to claim a loss, they need to demonstrate they have adequate stock and/or debt basis. See: IRS
- S Corporation Stock and Debt Basis
It appears that your S-Corporation's loss exceeded your and your wife's basis in the S-Corp, and there are Basis
Limitations for K-1 Losses.
