Suspended or Unallowed Loss on a Schedule C
A taxpayer operating a business reported on a Schedule C is usually deemed to be materially participating in the business. This designation is indicated on Line G of Schedule C, and in the Schedule C Edit Menu in Softwar 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 loss limitation 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.
Entering a prior year unallowed loss on a Schedule C in Software- Income Menu
- Business Income/Loss (Sch C, 1099MISC)
- Select the business
- Answer Schedule C Questions
- Prior Year Unallowed Loss - enter the unallowed loss from the prior year's Form 8582 for this business activity.
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