What this line means
A yes-or-no question asking whether you are reporting any loss from a partnership or S corporation that was not allowed in a prior year due to at-risk limitations, basis limitations, or passive activity loss rules. If you answer “yes,” it signals that you are carrying forward previously disallowed losses and deducting them in the current year because your basis, at-risk amount, or passive income now supports the deduction.
Does this apply to you?
- You had a partnership or S corporation loss in a prior year that exceeded your tax basis in the entity
- You had a prior-year loss limited by at-risk rules because you did not have enough at-risk investment
- You had a prior-year passive loss from a partnership that was suspended under passive activity rules
- You received a Schedule K-1 showing a current-year loss and also have carryforward losses from prior years
Easy to overlook
Three separate limitation rules apply in a specific order Partnership and S corporation losses are limited by three tests applied sequentially: (1) tax basis, (2) at-risk amount, and (3) passive activity rules. A loss must pass all three to be deductible. Losses disallowed at one level carry forward and are retested each year. If your basis increased this year (new contributions, share of income), prior-year losses blocked at the basis level become available to test against at-risk and passive rules. 1 IRS Publication 925 — Passive Activity and At-Risk Rules
S corporation basis requires separate tracking Your basis in an S corporation is not reported on the K-1 itself. You must maintain a basis schedule (often using Form 7203) that tracks stock and debt basis annually. Many S corporation shareholders do not realize their basis is insufficient to absorb current or carryforward losses until the IRS disallows the deduction. Check your basis before claiming any loss. 2 IRS Schedule E instructions — Line 27
Watch out for this
Answering “no” when you have suspended prior-year losses that are now usable. If your basis or at-risk amount increased during the year (through additional investments, loan guarantees, or share of entity income), previously disallowed losses may now be deductible. Failing to claim them wastes the deduction. Review your prior-year Form 8582 and basis calculations before answering this question.
Footnotes
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IRS Publication 925, Passive Activity and At-Risk Rules. https://www.irs.gov/pub/irs-pdf/p925.pdf ↩
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IRS Form 7203 Instructions, S Corporation Shareholder Basis. https://www.irs.gov/instructions/i7203 ↩