Can K-1 losses be used to offset capital gains from stocks? Tax question for small business owners

Thanks for the detailed explanation! So if I'm actively involved in running the business (I work there like 50+ hours a week), would that mean the passive activity rules wouldn't apply to me? Also, what's this "basis" thing you mentioned? I started the business with about $85k four years ago and have never taken distributions larger than profits until this year.

If you're working 50+ hours a week in the business, you'll likely meet the IRS's material participation test, so the passive activity limitations wouldn't apply to your situation. That's good news for using those losses. Regarding basis, since you invested $85,000 initially and haven't taken distributions exceeding profits until this year, you probably have sufficient basis to deduct these losses. Your basis would be your initial $85,000 plus any additional capital contributions and your share of business income over the years, minus any distributions you've received. So with your starting point and history, you likely have enough basis to claim the full $32,000 in losses.

It doesn't replace an accountant for complex situations, but it helps you understand what's happening with your taxes. It analyzes your documents and explains the rules that apply to your specific situation - so you can make better decisions or have more productive conversations with your accountant. I still use an accountant but spent way less time with them because I understood the basics first. For multiple K-1s and rental properties, it would definitely help you understand how they all interact on your return. It's not tax preparation software like TurboTax - it's more like having a tax expert explain your specific situation in plain language, showing exactly how different income sources and deductions affect each other.

That sounds useful, but does it actually tell you what you're allowed to deduct? My CPA charges me $450 an hour and I'm looking for a cheaper option. Can this replace an actual accountant for something complicated like K-1 losses?

I'm a bit confused about how this works. Is it like TurboTax or something different? I've got K-1s from two different businesses plus some rental property losses and never know if I'm doing it right.

It doesn't replace an accountant for complex situations, but it helps you understand what's happening with your taxes. It analyzes your documents and explains the rules that apply to your specific situation - so you can make better decisions or have

Wait, how does this even work? The IRS phone lines are impossible to get through. I spent 3 hours on hold last month and then got disconnected. Are you saying there's a way to skip that whole process?

This sounds like total BS to me. There's no way to "skip the line" with a government agency. They probably just keep calling repeatedly or something anyone could do themselves. Why would you pay for that?

It's not about skipping the line - they use a system that continuously redials and navigates the IRS phone tree until it gets through, then it calls you back and connects you. So instead of you personally waiting on hold, their system does the waiting and only connects you once an actual person is on the line. It's not magic - it's just technology handling the frustrating part. I was dealing with a specific question about business loss limitations that I couldn't get answered clearly online, and speaking directly to an IRS agent saved me from potentially making an expensive mistake. For me, it was worth it to get a definitive answer rather than guessing about how to report my situation.

We're set up as an LLC that's taxed as an S-Corp (we file 1120-S), so we get K-1s. Our losses aren't anywhere near that $592k threshold, thankfully - we're talking about ~$32k in losses. I'm just trying to figure out if I can use those to offset gains from selling some stocks this year or if I should hold off on selling until next year when we might be profitable again.

Since you're structured as an S-Corp, your losses will pass through to your personal return via the K-1, and you can use those losses to offset your capital gains, as long as you have sufficient basis in your S-Corp shares and you materially participate in the business (which it sounds like you do with those 50+ hour weeks). Given your numbers ($32k in losses potentially offsetting $27k in gains), it would likely make sense to sell the stocks this year while you have losses to offset them. If you wait until next year when the business is profitable, you'd have to pay capital gains tax on those stock sales without the benefit of the offsetting losses. Just make sure you've satisfied the long-term holding period for the stocks to qualify for the preferential long-term capital gains rates.

Not a dumb question at all! Tax software should handle this automatically. Your K-1 income/losses flow to different parts of your 1040 - ordinary business income/loss goes to Schedule E, while any capital gains/losses from the K-1 go to Schedule D along with your personal stock sales. The software will combine all sources of income and loss on the appropriate forms. Just make sure you enter all the information from your K-1 correctly into the software - there are a lot of boxes and it matters which ones go where. H&R Block should have a specific K-1 interview section to walk you through it.

That's a really good point about timing! I was actually thinking about this too. Since we know the business will show losses this year, it seems like the smart move is to sell the appreciated stocks now rather than waiting until next year when we might (hopefully) be profitable again. That way the losses and gains happen in the same tax year.

This is really helpful advice about state taxes - I hadn't even thought about that! We're in California, so I should probably check if they have any weird rules about K-1 losses. The point about spreading the stock sales across tax years is interesting too. Since our business losses are putting us in a lower bracket this year, would it make sense to realize more gains now while we're in that lower bracket, or does it not matter much for long-term capital gains rates? I'm not super familiar with how the brackets work for capital gains vs regular income. Also, you mentioned rental properties - we don't have any, but my wife does have a small side consulting business (also on a K-1). Would losses from both businesses be able to offset the stock gains, or are there limits on combining multiple K-1 losses?