Can I uncheck "I have passive activity losses carried over from last year" ?

[Juri]

For several years, I have used TurboTax Business to file my S Corp and TurboTax Online to file for myself. During the startup of my S Corp, I erroneously indicated the first year of loss as a passive activity. All years since then have properly been classified as non-passive income (product sales). It's unlikely I will ever have passive activity in the future. TurboTax Online has pre-checked the statement "I have passive activity losses carried over from last year." What will happen if I uncheck the box? Will the PAL stop carrying forward every year, and is this allowable/advisable?

[PatriciaV · Accepted solution]

In most cases, you need to re-enter the passive loss carryover each year. You aren't required to report or use disallowed losses. So you can choose to remove this carryover from your return.

However, according to IRS Pub 925 Treatment of former passive activities

A former passive activity is an activity that was a passive activity in any earlier tax year, but isn’t a passive activity in the current tax year. You can deduct a prior-year unallowed loss from the activity up to the amount of your current-year net income from the activity. Treat any remaining prior-year unallowed loss like you treat any other passive loss.

This means you can apply your passive loss carryovers up to the amount of income from your active business. Anything over that income would be carried over to next year. This may be a better treatment in your situation, if you have taxable income from this business this year.

[Juri]

Thank you!