If you report a loss on a K-1 form does it mean you have to pay out taxes?

Question

I have stock in a small S-Corp and had a loss around $1000 on my K-1. Does anyone know if I can expect to pay money to the IRS based on the K-1? Thanks!!

Answer 1

Hello, Annie! As the first answer states, it is impossible to tell just from the K-1 whether you will owe taxes without knowing the rest of your information. But I'm guessing that the essence of your question is: "Will I owe extra money because of the K-1 loss?" If that is correct, then here is your short answer: No, you won't have to pay extra taxes on the K-1 loss (in fact, it will probably lower your tax due).

The full answer is a bit more complex. S-corps are "pass-through" entities, meaning that none of the income is taxed at the corporation level; it is passed down (via the K-1) to the shareholders based on their ownership percentage.

In this case, the S-corp evidentally had a net loss for 2006, and your share of the total S-corp losses is $1,000. You would record this on Schedule E, Page 2, and from there it is carried to Line 17 of your 1040 ("Rental real estate, royalties, partnerships, S corporations, trust, etc"). Because it is a loss, it will offset (lower) the rest of your income, thus lowering whatever tax you otherwise would have paid.

Please note: this was the basic answer. :-) In reality, there are different types of income and loss that can be passed through from an S-corp, and many of them are reported in different places on your tax return. Furthermore, you have to track something called "basis" (what you originally paid for your shares, adjusted yearly by the gain/loss that is passed through). This can obviously get rather complicated, so you might want to consider using a tax professional who can help you correctly report the K-1 information year after year. If you want to tackle it yourself, the link below will take you to the IRS instructions for S-corp shareholders. Good luck! :-)

*** Update ***

Although I stand by my original statement that "you won't have to pay extra taxes on the K-1 loss", User "tma" is absolutely correct. Since the loss could be considered "passive," it is very possible that it would have no effect on your 2006 tax return. I should have originally stated that "it MAY POSSIBLY lower your tax due" and "it MAY offset (lower) the rest of your income." As I said, this goes well beyond the basics and may require professional assistance.

Answer 2

Mr. Tax Preparer isnt totally correct.

if this is considered a loss from a "passive activity" then you would need to have passive income in order to offset the loss. if you dont, then the loss will have 0 tax effect on your tax return and will be carried forward to future years.

Answer 3

You'll need to file a special form for it but 'NO' you won't have to pay on it, it's just that a loss. You will need to know how much you originally paid for it, then deduct or add the increase or loss from the original price.

Answer 4

You would need to give more information. The K-1 is just a piece of the puzzle. No one would give accurate advice without more info.