Taxpayers with 2008 net operating losses from "small" businesses are eligible for a five-year loss carryback under recent legislation. If you have such a loss, there's a good chance it will be reported to you on a K-1. Unfortunately, just because your K-1 shows a loss doesn't necessarily mean you can deduct it.
Three limits apply to the use of K-1 losses, in this order:
1. You can't deduct losses in excess of your basis.
2. Even if you have basis to deduct losses, the basis has to be "at-risk," and
3. Even if the basis is "at-risk," losses that are "passive" might be limited.
Unfortunately, K-1s aren't designed to track your basis in your partnerships or S corporations. It's up to taxpayers and their preparers.
- Your basis starts with your initial investment in your ownership interest.
-It is increased by tax-exempt income (like municipal bond income) and reduced by permanently non-deductible expenses (like the 50% non-deductible portion of meals and entertainment expenses); these are reported on line 16 of the 1120S K-1 and line 18 of the 1065 K-1.
- It is increased by capital contributions, which appear nowhere on the 1120S K-1 and on Part I, line L of the 1065 K-1.
- It is reduced by distributions, which are on line 16 of the 1120-S K-1 and Line 18 of the 1065 K-1.
Partners also get basis for their share of partnership debt, as reported on line K of the K-1. In contrast, S corporation owners only get basis for loans they make themselves to the corporation; guarantees don't count. More on this
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The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to