S Corp ordering rules for losses and stock basis (nonpassive)

[Chessie]

IRS S Corp ordering rules: 1. increase for income; 2. decrease for distributions; 3. decrease for nondeductible expenses 100%; then 4. decrease for losses and deductions. Items in 4 are allocated pro-rata if insufficient basis. 

So why does 1040 ProSeries on K-1 Wks - S Corp add 3 & 4 together then allocate all of them pro-rata when there is insufficient basis?  Why doesn't ProSeries Professional correct their computation?  

Is there an easier way to handle this rather than override line-by-line-by-line-by-line?  This has become more important now that basis statements must be attached.  It is a time-waster to have to manually override ProSeries both on this worksheet and on 6198.  And we will see more losses in 2020 if the stay-at-home orders and economy don't open up soon.  Any suggestions on how to handle this for 2019?

[TaxGuyBill]

I had researched this a few years ago and my conclusion is that ProSeries does it correctly.  The non-deductible expenses are prorated when there is not enough Basis.

Offhand, I can't remember the Regulation or whatever that dictates that, but I do remember that my conclusion is that prorating it is correct.

As a side note, although I realize many ProSeries users use Form 6198 for this purpose, it is NOT correct to file Form 6198, as limitations for"At Risk" is different limitation than "Basis" (although the calculations are the same).

[Chessie]

Thank you.  

Here's the IRS stance along with their example.  https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-stock-and-debt-basis

The 4 ordering steps are mid-page above where it says "Stock Basis Example".

The example deducts the $1,000 non-deductible expenses from basis first then allocates remaining basis only between ordinary loss and charitable contributions.  It does not include the $1,000 non-deductible in the pro-rata allocation of remaining basis. 

In prior years I have ignored the fact that Proseries does not follow this example.  However, I have a 1040 client who has a couple S Corps prepared by a large CPA firm.  For one S Corp the 2019 ordinary loss is very sizeable  and the non-deductible is several thousand (significant M&E due to nature of business).  So whether I deduct the non-deductible first against remaining basis OR allocate non-deductible pro-rata with items of loss and deduction is a difference of a few thousand in the amount that the taxpayer can deduct.

It is much more noticeable now that we have to attach a basis statement.

Your thoughts?

[Chessie]

What made it even more noticeable was that with the K-1 I received from the large CPA firm I also recieved their basis statement for this SH.

Their basis calculation reduces basis by 100% of non-deductible before then doing the pro-rata allocation between ordinary loss and charitable contributions.

[TaxGuyBill]

Offhand, I don't remember.

MAYBE it is a difference for "At Risk" losses (Form 6198) versus Basis losses (which do NOT use Form 6198).  Although that isn't what I remember, my memory isn't super clear on this point.

Are you using 6198 for that calculation?  If so, *IF* there is a different between calculating At Risk loss versus Basis loss, that is the problem.  Form 6198 is not used for Basis losses.  You would need to manually do it.

[Chessie]

There would be no difference between and At-Risk limitations rules for this client because only debt is nonrecourse.  And no shareholder loans.

I had checked the box Some investment in corporation not at-risk.

I will just have to manually compute basis allocation.