K-1 losses with 0 stock basis, yet still deducted from taxable W-2 earnings on 1040. How is it possible?

If my S-Corp stock basis is 0 at the beginning and end of the year, why is the K-1 loss deducted from the taxable W-2 earnings on the 1040?

Trying to understand if I am doing something very wrong.

Form 7203: lines 1, 2, and 15 = all are 0, and line 43 is a loss.

Schedule E: line 31 is the same loss as 7203 line 43.

1040 Schedule 1: lines 5 & 8 same as Schedule E line 31.

1040 page 1: line 9 confirms same loss as all others.

TIA.

792

Expert Alumni

Apr 4, 2025 6:32:16 AM

The loss should not be deducted if you don't have any positive basis in the corporation. You need to edit your K-1 entry in TurboTax. You need to not indicate that all of your investment in the entity is at risk on the screen that says Other Situations. Then you will see options to indicate how much you have at risk, which in your case is nothing:

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K-1 losses with 0 stock basis, yet still deducted from taxable W-2 earnings on 1040. How is it possible?