How to Limit the Allowed Loss from Schedule K-1 for a C-Corporation

[CR4]

I would like to ask for guidance on limiting a partnership loss reported on a Schedule K-1.

Background:
My client is a C-Corporation that holds an ownership interest in a partnership.

Details:
In 2024, the partnership incurred a net loss, and as a result, my client received a Schedule K-1 reflecting their share of the loss.

I have already entered everything from the K-1 into the corporate return. However, based on the partnership basis rules, my client is only allowed to deduct a portion of the reported loss.

Currently, the Form 1120 reflects the entire loss, but I need to properly limit it based on the client's basis.

For example:
Partnership Net Loss: 500,000
Client's Ownership: 50%
Schedule K-1 Loss: 250,000
Client's Basis: 100,000
Allowed Loss: 100,000
Disallowed Loss: 150,000
Loss currently showing on Form 1120: 250,000

What is the correct way to reflect the limitation on the return?

1. Should I adjust the K-1 loss manually to reflect only the allowed $100,000?

2. Should I add an income adjustment to offset the excess loss, resulting in a net deduction equal to the allowed loss?

3. Or if you have other solutions.

Thank you in advance for your guidance!

[PhoebeRoberts]

Any presentation that gets you the correct tax answer works. Assuming no non-deductible expenses or capital losses, either of your proposals will result in the same net result.

Because I'd have to do an Excel schedule of the basis limitation for each separately-stated item anyhow, my personal preference would be to lean towards your first choice, and attach the Excel to the tax return (e-file, client copy, your copy) so that in case there's ever a question, it's obvious how you arrived at the presentation you used.

[CR4]

Hi @PhoebeRoberts,

Thank you so much for your response.

Will do that now.