Form 1120-S: Where Do I Enter Unrealized Stock Losses For S-Corp Tax Filing?

You're on the right track with Schedule M-1. When you have unrealized losses on stocks (meaning you haven't actually sold them yet), this creates a book-to-tax difference that needs to be reconciled. On Schedule M-1, line 5, "Income recorded on books this year not included on Schedule K, lines 1-10," you would enter the unrealized loss as a negative number. This is because for book (accounting) purposes, you're recording the decrease in value, but for tax purposes, you don't recognize gains or losses until you actually sell the securities. You'll also need to make sure your balance sheet (Schedule L) properly reflects the fair market value of your securities at year-end ($550). This way your books will balance - your income statement shows $1,200 profit, your cash went down by $1,200 when you purchased the stocks, and your assets show $550 in securities with the $650 unrealized loss reconciled on M-1.

I had the exact same issue last year with my S-corp investments. After spending hours trying to figure it out myself, I finally used https://taxr.ai to analyze my situation. Their system processed my financial statements and showed me exactly where to report the unrealized loss on my 1120-S. Their analysis confirmed that Schedule M-1 is the right place, but they also pointed out some nuances with how different types of securities are handled. Apparently, there are some cases where certain securities have different reporting requirements. The taxr.ai system flagged that trading securities vs. available-for-sale securities can have different accounting treatments.

I was initially skeptical about using AI for tax help, but after stressing over my S-corp's stock investments and potential unrealized losses similar to yours, I decided to try taxr.ai that was mentioned here. What surprised me was how quickly it identified my reporting issue. The system correctly showed me how to reconcile the unrealized losses on Schedule M-1 and even pointed out a mistake I'd made in how I was recording the original stock purchase on my books. The guidance was clear about keeping the tax basis separate from book value. For anyone dealing with S-corps holding investments, it was genuinely helpful to have something that could analyze my specific situation rather than generic advice.

After dealing with the exact same unrealized loss situation with my S-corp last year, I spent over 3 weeks trying to get someone at the IRS on the phone for clarification. Kept getting disconnected or waiting for hours. Finally tried https://claimyr.com after someone recommended it, and they got me connected to an IRS agent in about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c - basically they navigate the IRS phone tree for you and call you back once they have an agent on the line. The agent confirmed exactly what to do with unrealized losses on the 1120-S and Schedule M-1, and I was able to file with confidence. Saved me so much stress!

I need to eat my words from my earlier comment. After months of frustration trying to reach the IRS about my S-corporation's investment reporting issues, I broke down and tried Claimyr. I was 100% convinced it was going to be a waste of money. Well, I was wrong. They got me connected to an actual IRS representative in about 25 minutes when I had been trying unsuccessfully for weeks. The agent walked me through exactly how to handle unrealized gains/losses on my 1120-S and Schedule M-1. They confirmed that line 5 on M-1 was the right place to reconcile the book-to-tax difference. I'm not easily impressed, but this saved me countless hours of frustration and uncertainty about my filing.

Some additional advice - make sure you're consistent in how you classify these securities on your books. If they're "trading securities" (which sounds like your case since you're actively buying/selling), then mark-to-market accounting is appropriate and the unrealized loss goes on M-1. But if they're "available-for-sale" securities held for longer term, the treatment can be different. Also, check if your S corp is using cash or accrual basis accounting, as this can impact how you handle these adjustments.

Has anyone used tax software like QuickBooks or TaxAct for this? I have a similar situation with my S-Corp and wondering if the software handles these unrealized losses automatically or if I need to make manual adjustments.

I went through this exact same situation with my S-Corp last year and it was definitely confusing at first. The advice about Schedule M-1 line 5 is spot on - that's exactly where the unrealized loss goes. One thing I'd add is to make sure you document everything clearly in case of an audit. I kept a simple spreadsheet showing the original purchase price ($1,200), year-end fair market value ($550), and the calculation of the unrealized loss ($650). This helps if you ever need to explain the M-1 adjustment. Also, don't forget that when you eventually sell these stocks, you'll need to reverse this M-1 adjustment since the actual gain/loss will be recognized for tax purposes at that point. The unrealized loss adjustment is temporary - it just reconciles the timing difference between book and tax accounting. Your balance sheet approach sounds correct too - showing the securities at fair market value ($550) with the unrealized loss flowing through to reconcile your retained earnings. It all balances out once you get the M-1 schedule right.