Let’s say you have a loss from a limited partnership you invested in, or you are a shareholder in an S Corporation and have a flow-through loss. You have to determine if you’ll be allowed to take the loss on your tax return; it is not automatically allowed. The first limitation is basis. You must have adequate basis to deduct the loss. You obtain basis with your investment in the activity and from the flow-through gains and income. Basis is reduced by flow-through deductions, losses and withdrawals or distributions. Then, if you have enough basis to deduct the loss, you have to pass the at-risk rules. If you determine that you have at-risk basis, you then will need to pass the passive activity limitation. Passive losses are only allowed against passive income (except in the year of disposition of the activity). If you are unsure if your tax preparer has tracked your basis and at-risk basis from year-to-year, contact us. We can recap your basis from prior years’ tax returns and ensure that you are deducting losses when allowed.
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