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?

  • Your title says capital loss, but your text doesn't. For capital loss -- either passthrough from K1 or direct, or a combination -- you offset other income up to $3,000 per year, with any loss beyond that carried forward. See Schedule D line 21, and the instructions (and worksheet) for lines 6 and 14. To be clear however, a loss allocated from a partnership or S-corp isn't a capital loss to you merely because you have capital at risk in one of those entities. – dave_thompson_085 Feb 21 at 4:14
  • @dave_thompson_085 ah ok then my bad sorry. I updated the question. It's a loss from an S-corp. Please feel free to write an answer that reflects adequately – james Feb 21 at 5:25
  • Then I think you have it right already. Schedule E losses, unless deferred as passive, occur in the year they occur. Only the part of your loss not including personal deductions and capital loss can be carried forward as NOL. Sorry. – dave_thompson_085 Feb 23 at 16:25

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