Loss in excess of basis

[Anthony C]

I have an S Corp with husband/wife shareholders with 50/50 stock ownership.

Basis schedule was created for 2018 and 2019 but should have had K-1 Ordinary Income losses suspended due to basis limitations, about $30k each after 2019. 

Question is, recognize that amount as a capital gain in 2020 or is this just a basis adjustment with no recognition of capital gains?

Not to complicate any further its S Corp with rentals, no W2 paid, and they want to revoke the S Corp at the end of 2020. 

Thanks for your help!

[itonewbie]

Your accountant should be able to help.  Alternatively, you could visit the TurboTax Help site for support.  This Community is only open to tax professionals and does not assist with consumer questions.

My bad.  Misread the context of the question.

[Anthony C]

tax pro reaching out for help, not sure where you got consumer from.

[TaxGuyBill]

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@Anthony C wrote:

losses suspended due to basis limitations, about $30k each after 2019. 

Question is, recognize that amount as a capital gain in 2020 or is this just a basis adjustment with no recognition of capital gains?

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If there is $30,000 of suspended Basis losses from 2018/2019, then in 2020 the first $30,000 of "ordinary income" (Box 1) will be tax free.  Not a capital gain or taxable at all.  If the business had $40,000 of income in 2020, that first raises Basis to $40,000, but then using the $30,000 of suspended losses will lower the Basis (for 2021) down to $10,000.

Does that help?  If not, can you give more details and explain why you think something would have a taxable gain?

[Anthony C]

There was no suspension and in 2018/2019 claim a loss that they were not allowed to take. 

[TaxGuyBill]

Are you saying the losses SHOULD have been suspended but they took them anyways?

If so, the taxpayer should amend their 2018 and 2019 tax returns to un-claim those losses.  And then the losses will be suspended and potentially usable on the 2020 return.

[Anthony C]

Not going to amend. Any solutions for 2020?

[TaxGuyBill]

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@Anthony C wrote:

Not going to amend. Any solutions for 2020?

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I would tell the client to amend, or go away. 

You know there SHOULD be $30,000 of suspended losses on the 2020 tax return to file a correct 2020 tax return.  But I certainly would not claim that knowing they already took those losses. And don't forget that when you claim losses, you need to include a Basis schedule with the tax return.

So from my viewpoint, in order to prepare a correct 2020 tax return, they NEED to amend 2018 and 2019.  Personally, I would not prepare 2020 unless they do that.

[sjrcpa]

If losses in excess of basis were deducted on 2018 and 2019 tax returns, those returns need to be amended to show the correct losses.

If distributions in excess of basis were taken in those years, that is capital gain income for those years.

EDIT: I did not see any other answers when I posted mine.

[rbynaker]

I agree with Bill.  Just curious, what's funding the losses?  Bank loan/car loan?

Edit: Nevermind.  I read this again and saw that it was rentals.  Probably depreciation is happening faster than principal payments on the loans.

[Anthony C]

Rental properties.