Pass-Through Loss Limitations [CPA Prep]

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🎓 Lesson Overview:
In this lesson, Nick Palazzolo, CPA, delves into the intricate world of pass-through loss limitations, especially how they apply to S-Corporations and partnerships. He emphasizes the importance of understanding these concepts, as they often feature in simulation questions on the exam and bear significant relevance in real-world applications. Nick demystifies the distinction between tax basis and at-risk basis limitations, explaining how they affect the deductibility of losses on individual tax returns. He also provides various examples and scenarios to clarify how these limitations work, including the implications for shareholders when losses exceed their respective bases and the handling of suspended losses in cases where an S-Corp is sold. This comprehensive overview offers clarity on the two critical aspects of S-Corp taxation, rendering what can often be a complex subject into digestible, applicable knowledge.
🔍 Key Topics Covered:
- S-Corporation Losses
- Pass-Through Limitations
- Tax Basis Limitations
- At-Risk Basis
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[@LA2JERSEY]

Thank you. I just don't get exactly what is the pass-through. There is a line on 1120s, 1065, even 1041 to pay tax. How does it pass through?

[@examprepai]

Hey there! Great question. The "pass-through" part can be confusing. Here's the gist: Those forms (1120S, 1065, 1041) are filed by the business or trust, but they usually don't pay the tax. Instead, the income and losses "pass through" to the owners' personal tax returns. The owners then pay the tax on their individual 1040s. The business gives each owner a K-1 form showing their share of profits or losses. This way, the income is only taxed once, at the individual level. Hope that clears things up!

[@LA2JERSEY]

@@examprepai Thank you for the reply. But at the end of the 1120s, 1065, 1041 forms, there is a column to pay tax. I'll look into the forms again. Thank you.

[@examprepai]

@@LA2JERSEY Ah, I see what you're referring to. You're right, there are lines for tax on those forms.
1120S (S-Corps): The tax line is usually for special cases, like built-in gains tax. Most S-Corps won't pay tax here.
1065 (Partnerships): Similar story. The tax line is for rare situations, not regular income tax.
1041 (Trusts/Estates): This one's a bit different. Some trusts do pay tax at the entity level, but a lot still passes through to beneficiaries.
In all cases, the main business income usually passes through to owners/beneficiaries. Those tax lines are for specific situations, not the regular business income.
Good eye for detail! Let us know if you have any other questions.

[@LA2JERSEY]

@@examprepai Thank you so much! Please keep the good tutorials coming.