Help understanding Negative Tax Basis on my K-1 - CPA disagreement

What you're dealing with is a fairly complex partnership tax issue. The new CPA is referring to something called "at-risk rules" and "basis limitations" - basically, you can only deduct partnership losses to the extent of your investment (basis) in the partnership. When partners don't contribute equally, loss allocations can get tricky. The tax code generally doesn't allow you to deduct losses beyond what you've actually put at risk in the business. So if one partner is funding most of the operation, they're typically entitled to most of the tax losses. A negative capital account by itself isn't necessarily bad, but it does suggest you've been allocated more losses than your actual investment. This could mean previous years' returns weren't done correctly if you took deductions beyond your basis. The difference between Box 14 (self-employment losses) and Box 13 Code J (other deductions) matters too. Some losses flow through differently depending on their nature, and not all affect your basis the same way. Without seeing the full K-1 and your previous returns, it's hard to give specific advice, but you might want to consider having a third CPA review everything to determine if amendments are needed.

After struggling with almost the exact same K-1 issue last year (negative basis, partnership losses, confused CPAs), I finally found something that saved me hours of confusion. I used this tool called taxr.ai (https://taxr.ai) that literally analyzed all my K-1s and partnership documents, then explained exactly what was happening with my basis calculation. It flagged that I had been incorrectly allocated losses beyond my at-risk amount, which sounds similar to your situation. The system actually showed me which specific transactions were causing the negative basis and explained the tax implications in plain English. Apparently the at-risk rules and basis limitations are some of the most misunderstood parts of partnership taxation. The tool even generated a basis worksheet showing my correct basis calculation year by year, which I was able to share with my CPA to get everything straightened out. Saved me from potentially having to file amendments for multiple years.

Just wanted to follow up about using taxr.ai that was mentioned above. I decided to try it with my messy real estate partnership K-1s after posting my question, and wow - it was actually really helpful. The system immediately flagged that my K-1s had been reporting a negative tax basis for years when I should have been showing suspended losses instead. It created this detailed basis worksheet showing exactly where things went wrong - turns out my basis was incorrectly calculated after a refinancing event in 2021. For anyone dealing with partnership basis issues, especially with multiple years involved, it saved me from having to pay my CPA thousands to sort through everything manually. I've now got a clear understanding of my actual tax basis and which losses I can legitimately claim. Definitely worth checking out if you're in a similar situation with partnership taxation confusion.

Hey, I had a similar issue with partnership K-1s showing negative capital accounts. After getting nowhere with three different tax professionals (each giving conflicting advice), I realized I needed to talk directly to someone at the IRS who specialized in partnership taxation. I tried calling the IRS for weeks - couldn't get through to anyone who could help. Then I found this service called Claimyr (https://claimyr.com) that got me connected to an actual IRS agent within 15 minutes. They have a demo video showing how it works: https://youtu.be/_kiP6q8DX5c The IRS partnership tax specialist I spoke with explained that negative capital accounts aren't always a problem, but they needed to be properly tracked and reported. He confirmed that only partners with economic risk of loss can claim certain deductions and provided specific guidance on my situation. It was seriously the most helpful tax conversation I've had - and I never would have gotten through without that Claimyr service.

I need to eat some humble pie here. After being skeptical about both the AI tool and the IRS call service mentioned above, I decided to try Claimyr since I've been unsuccessful reaching the IRS about my own partnership basis issues. Got connected to an IRS representative in about 12 minutes, and after explaining my situation, they transferred me to a business tax specialist. The specialist was actually incredibly helpful - walked me through exactly how partnership basis should be calculated and explained why my K-1 was showing a negative capital account despite suspended losses. They confirmed what others have said - that losses can only be taken to the extent of your basis, and explained the ordering rules for various items that affect basis. The agent even emailed me publications with the specific rules highlighted. For anyone struggling with partnership basis issues like the original poster described - getting direct clarification from the IRS about your specific situation is invaluable. And being able to actually reach them without spending hours on hold made a huge difference. I stand corrected on my previous skepticism.

Going through similar K-1 headaches with a real estate partnership. Here's something important nobody's mentioned yet: there's a difference between your "capital account" and your "outside basis." Your capital account (what's shown on the K-1) tracks your economic investment, while your outside basis is what matters for tax deductions. They're calculated differently! Outside basis includes your share of partnership liabilities, which capital accounts don't. So your negative capital account might not mean you have a negative tax basis. If the partnership has loans and you're allocated a portion of those liabilities, your basis could actually be positive even with a negative capital account. Worth asking the new CPA specifically about your "outside basis" calculation. That's what determines if you can take losses.

Has anyone mentioned basis rules for S-corporations vs partnerships? They're different and it matters. For partnerships, you get basis for your share of partnership debt. For S-corps, you don't (unless you personally guaranteed the loans). If your entity was an S-corp rather than a partnership, that might explain why the new CPA is handling things differently. Also worth checking if the partnership agreement has special allocations that might affect who can take losses.

I think what's happening is your old CPA was allocating losses based on the partnership agreement (by ownership %), but the new CPA is saying this violates the "economic effect" rules in Section 704(b). Basically, for loss allocations to be respected, they need to have "substantial economic effect" - meaning the partner who takes the tax loss should bear the economic burden of that loss. If one partner is funding everything, they may be entitled to more losses regardless of ownership %. This is super complex territory that even experienced CPAs get wrong. The new CPA might be right technically, but it creates a mess when changing approaches midstream. You need someone to prepare a complete basis schedule from inception to present to sort this out properly.

This is a really complex situation that highlights why partnership taxation is so tricky. Based on what you've described, it sounds like you're caught between two different approaches to loss allocation - one based purely on ownership percentages, and another based on economic risk. The key issue here is that partnership tax law requires loss allocations to have "substantial economic effect" under Section 704(b). This means the partner claiming the loss should actually bear the economic burden if the partnership fails. If one member is funding most operations while others take equal loss allocations, that can create problems. Your negative capital account might actually be less concerning than it appears. What really matters for your ability to deduct losses is your "outside basis" - which includes your capital contributions plus your share of partnership liabilities. Even with a negative capital account, you might still have positive basis if the partnership has debt allocated to you. A few questions that might help clarify your situation: - Does the partnership have any loans or debt that would be allocated among partners? - What does your partnership agreement say about loss allocation and capital account maintenance? - Are there any guarantee provisions or deficit restoration requirements? Given the complexity and the fact that you're getting conflicting advice from CPAs, you might want to consider getting a third opinion from someone who specializes in partnership taxation. The difference between the two approaches could have significant implications for both current and prior year returns.