It depends. You will prepare your Form 1120S as normal. Even though you had very little or no income, as you state, your business had losses, so it was still active and needs to report. The losses will appear on Schedule K-1, and you will enter the K-1 information when you get to this portion of the return interview in TurboTax. But whether or not you will be able to claim the loss will depend on whether or not you have enough basis in the S corp to report the loss.
For an S-corp, your basis is essentially the amount you initially invested in the corporation. That basis is increased by the amount the company earns each year, and reduced by distributions and losses. (This is a simplified explanation, but essentially what happens.) For instance:
- Original investment: 25,000 (Basis is now 25,000)
- Year One: 25,000 gain of income (Basis is now 50,000). No distributions taken (gain stayed in the corporation).
- Year Two: 25,000 gain of income, 30,000 distributions taken (Basis is now 45,000)
- Year Three, 20,000 loss. Basis is reduced to 25,000, and the 20,000 loss is reflected on the return.
It is important to track the basis, which is not done automatically nor reflected on the tax return itself. (And if you are a multi-member corp, each shareholder must do so.) If, for example, the owner above only had 10,000 of basis entering into year three, the 20,000 loss would reduce his basis to zero. He would be able to report 10,000 of loss on his return, and the other 10,000 loss is suspended until income/basis is generated towards the S corp so as to absorb the loss.
Here is a link to an IRS website for additional information: S Corporation Stock and Debt Basis | Internal Revenue Service
**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"
