How do I get Turbotax to release passive income losses for an investment that has closed inside a 1120-S entity that is still operational.

[Jackstar221]

Hi,

A passive loss is reported on your individual schedule K-1.  Each year the passive losses incurred should flow through to each year's K-1, even if the if you hold onto the investment. After that, each shareholder will use their K-1s to show what part of the passive loss may be used on their 1040.

There won't be suspended passive losses at the S Corp level. I suggest reviewing the K-1s from prior years, it should have been reported on the K-1's from prior years. In the current year, when the investment is closed out, only the current year passive loss, as well as related gain/loss on the disposition of the investment would be reported on K-1 for the current tax year.

It is common for a S corp to provide a supplemental disposition report along with the schedule K-1. Inputting a investment sale inside an S corp to release prior year suspended losses requires an entire disposition of the S-corp itself, please reference this Tax Adviser Article:

Disposing Passive Activities 

To report an investment sale inside a S corp & release prior year suspended losses, the disposition should be reported in box 10 of the K-1. This is important information that helps report the sale on Form 4797. The S-corp will report the sale on the K-1's. Suspended passive activity losses would then be tracked on Form 8582. Shareholders will use the information from their K-1 to complete their individual Form 8582's.

Great question regarding K-1's, here is an article regarding how to enter a K-1 in TurboTax: 

TurboTax Where to enter a schedule K-1 that I received 

[K M W]

I believe you are referring to section 469 limits, which generally speaking limits the amount of losses, deductions, and credits that shareholders can claim from "passive activities".  However, the passive activity limitations do not apply at the corporate level - they apply to each shareholder's share of corporate income and loss.

If an S Corporation does have a passive loss in any given year, it would be reported on that year's K-1 and there is specific information that needs to be reported on the Schedules K and K-1.  Note that the S Corp would not hold onto those passive losses year after year; rather, each year the passive losses incurred should flow through to each year's K-1, even if the investment is still held by the S Corporation.  Then, each shareholder will use their K-1 to determine what part of the passive loss may be utilized on their personal tax return.  

As for your question on how to get TurboTax to release what sounds like suspended passive losses - there should not be suspended passive losses at the S Corp level.  I would recommend you review your prior years' S Corporation returns and corresponding K-1's - each year that there was a passive loss at the S Corporation level, it should have been reported on the K-1's in those years.  So, in the current year, when the investment is closed out, only the current year passive loss (and any corresponding gain/loss on the disposition of the investment) would be reported on the current year's K-1.