Net Section 1256 contracts loss election for S corp

[lucyx513]

I have a S corp with 1256 gains and losses. I am 100% owner of said S corp. 

In 2023 - S corp had 10,000 of gains. I filed 1120S. The gain got passed through to my personal return. 

In 2024 - S corp had 8,000 of losses. I am wondering if it's possible to make the net section 1256 contracts loss election, on either the 1120S or my personal return, to carry back the loss to 2023. Otherwise it gets carried forward and I am not sure if I will be able to use it. 

Thanks! 

[Mike9241 · Accepted solution]

the Section 1256 losses should be on line 10C of the k-1. The loss then flows to Form 6781 in your 1040. There you can make the carryback election. You must follow the rules that may limit the carryback. Even if not carried back these are capital losses that can offset future years' capital gains. If there are none, as long as you have positive adjusted gross income, you can deduct capital losses against it. up to $3,000 per year.

from instruction when box D c/b election is checked

Box D. Net Section 1256 Contracts Loss Election
If you have a net section 1256 contracts loss for 2024, you can elect to carry it back 3 years. Your net
section 1256 contracts loss is the smaller of:
• The excess of your losses from section 1256 contracts over the total of (a) your gains from section 1256
contracts plus (b) $3,000 ($1,500 if married filing separately), or 
• The total you would figure as your short-term and long-term capital loss carryovers to 2025 if line 6 of Form 6781 were zero. Use a separate Schedule D (Form 1040) and Capital Loss Carryover Worksheet (in Pub. 550) to figure this amount.

*************
The amount you can carry back to any prior year is limited to the smaller of:
• The gain, if any, that you would report on line 16 of Schedule D (Form 1040) for that carryback year if only gains and losses from section 1256 contracts were taken into account; or
• The gain, if any, reported on line 16 of Schedule D (Form 1040) for that carryback year.

***********************
The amounts just described are figured prior to any carryback from the loss year. Also, the carryback is allowed only to the extent it doesn’t increase or produce a net operating loss for the carryback year. The loss is carried to the earliest year first. Make the election by checking box D and entering the amount to be carried
back on line 6. To carry your loss back, file Form 1045, Application for Tentative Refund, or an amended return. Attach an amended Form 6781 and an amended Schedule D (Form 1040) for the applicable years.
On the amended Forms 6781 for the years to which the loss is carried back, report the carryback on line 1 of that year’s amended Form 6781. Enter “Net section 1256 contracts loss carried back from” and the tax year in column (a), and enter the amount of the loss carried back in column (b).

[lucyx513]

Thanks so much! I have a few follow up questions.

Also, the carryback is allowed only to the extent it doesn’t increase or produce a net operating loss for the carryback year. 

Is this net operating measured as the sum of my short term and long term capital gains? For example, if post carryback my short term would be a small loss but my long term would more than offset so my overall line 16 is positive, is that carryback allowed? 

Is this election/carryback allowed on state tax returns? If so I assume I would have to file amended tax returns? 

The loss is carried to the earliest year first. 

I understand it needs to be carried back to the earliest year first, but do I have to maximize the amount of carryback in year 1 first? Say I have 1000 loss from 2024 to carryback, I currently have gains of 200 in 2021, 300 in 2022, and 600 in 2023, do I have to do the full 200 in 2021, or can I choose to carryback 100 for 2021, 300 in 2022, and 600 in 2023? I may have preference to do this as I was in different states in those years. 

Should I file the current year return indicating the election and the amount before I file the amended return? If for some reason my amended return is rejected would I amend the 2024 return to undo the election? 

Thanks! 

[RobertB4444]

The net operating loss means that all of your income for the year would become negative.  You aren't allowed to do that with this carryback.  Causing all of your capital gains to become negative does not necessarily result in a net operating loss.  But if you only had $2000 in other income and then this loss caused a negative overall income that would be a net operating loss.

It depends on the state.  You will have to do some research on your state.  But probably you will have to amend the state return as well.

No.  You use the maximum allowable in each year before you are able to carryback any more into another year.

Yes.  You should file the current year return to generate the loss first and make the election.  Then you will file any prior years' returns to use the loss.  If those returns are rejected that means the election was rejected (I don't know why it would be).  In that case the loss would be carried forward instead of back.  You wouldn't do anything except carry the loss forward.

@lucyx513