A taxpayer operating a business reported on a Schedule C usually materially participates in the business. This designation is indicated on Line G of Schedule C, and in the Schedule C Edit Menu in TaxSlayer Pro it is found here:
- Answer Schedule C Questions
- Did you "Materially Participate"? - The default answer is YES.
Material participation is defined as being involved in a business activity in a "regular, continuous, and substantial" manner. The IRS has developed a detailed test that indicates if a taxpayer is materially participating in their business activity, primarily based on the number of hours dedicated to the business by the business owner. For more information on the material participation test see Publication 925 - Passive Activity & At-Risk Rules.
In the unusual situation when a taxpayer does not materially participate in a business activity that is being reported on their Schedule C, the ability to deduct a loss will be subject to the passive activity loss limitation rules. Under these rules, passive losses can only be used to offset passive income. The loss from an activity where the taxpayer does not materially participate is allowed to offset passive income from another activity. To the extent that a loss is not allowed it is suspended until a future year when the taxpayer has passive income.
If a return includes passive gains and/or losses, the passive activity loss rules are applied on Form 8582. Print and review this form to see how they are being applied and to diagnose why a loss is not being allowed.
Entering a prior year unallowed loss on a Schedule C
If the taxpayer has an unallowed passive loss from Schedule C carrying over from the prior year, this can be entered in the current year's return via Schedule C. From the Main Menu of the tax return (Form 1040) select:
- Income
- Business Income/Loss - Select the business and ensure all the income and expense have been entered for the business.
- Answer Schedule C Questions
- Did you "Materially Participate"? - Ensure this is answered NO.
- Prior Year Unallowed Loss - Enter the unallowed loss from the prior year's Form 8582 for this business activity up to the amount of net profit from this year's activity.
Note: This is a guide on entering an unallowed prior year loss from a Schedule C into the TaxSlayer Pro program. This is not intended as tax advice.
Additional Information:
IRS Publication 925 - Passive Activity & At-Risk Rules