Suppose the following example:
- +$10,000 wages
- -$15,000 nonpassive K1 losses from an S-corp
- -$12,000 standard deduction
If the IRS forces me to use the K1 losses to offset wages first, before the standard deduction can come into play, then basically what happens is $10,000 of those K1 losses offsets the wages, the AGI is $0, the standard deduction isn't really needed because taxable income is $0. And then the remaining $5,000 losses qualify as a carryover.
However, for me, obviously what's much more beneficial is if I can choose to not use the K1 losses this year, somehow, since the standard deduction is enough alone to net out my wages and get me to taxable income $0, and then I can keep the entire $15,000 losses as a carryover.
Which situation is correct under IRS rules?