How to apply the basis limitation on a passive loss?

Question

On IRS Form 8582, Part V (or worksheet 3 in 2020) tells me to enter the income or loss from my passive partnerships. Then Parts VII and VIII (or worksheets 5 and 6 in 2020) tell me to calculate how much of those losses are unallowed and allowed based on the ratio of net losses of all the partnerships. For each partnership, the amount that's not allowed can be carried forward to future years.

But for each partnership, I'm not supposed to claim a loss that exceeds my basis in that partnership. There's nowhere on Form 8582 or Schedule E to enter my basis and apply it to increase the unallowed amount calculated in Part VII (or worksheet 5). Where do I apply that basis limitation on the calculation of the amount of unallowed passive losses?

Answer 1

The instructions to the form provide the necessary guidance:

Coordination With Other Limitations

Generally, PALs are subject to other limitations (for example, basis and at-risk limitations) before they’re subject to the passive loss limitations. Once a loss becomes allowable under these other limitations, you must determine whether the loss is limited under the passive loss rules...

Basically what it means is that only the loss allowable to begin with should be considered for PAL. So if the loss is not allowable due to basis or at risk limits - it shouldn't be considered for PAL at all. You should not include loss in excess of these limitations on Form 8582. You can use the Form 6198 for this calculation. Whatever ends up being a deductible loss on Form 6198 will then be carried over to form 8582.