Drake Tax - 1040: Schedule E, Page 2: Prior-Year Adjustments (PYA)
Article #: 19029
Last Updated: September 15, 2026
Prior-year adjustments (PYA) can appear on Schedule E, page 2, when a taxpayer has prior-year unallowed losses from a partnership or S corporation that were limited by the basis or the at-risk rules and those losses become deductible in the current year.
The IRS instructs taxpayers to report prior-year losses that are now deductible separately from current-year partnership or S corporation amounts. These losses are entered on a separate line of Schedule E, page 2, with PYA in column (a). They are not combined with or netted against current-year amounts.
When Prior-Year Losses Become Allowable
Current-year income and other basis increases can provide sufficient basis for some or all prior-year basis-suspended losses to become deductible. Losses suspended under the at-risk rules may become deductible when the taxpayer's amount at risk increases.
For S corporation shareholders, losses and deductions that exceed stock and debt basis are suspended and carried forward. Suspended losses retain their character and may become deductible in a later year when sufficient stock or debt basis is available.
For partners, losses and deductions that exceed adjusted basis in the partnership are also suspended and carried forward. Prior-year suspended items are included in the current-year basis calculations and may become deductible when sufficient basis is available.
Note Restored basis does not necessarily mean that the entire suspended loss is deductible. After the basis limitation is applied, the loss may also be subject to the at-risk, passive activity loss, and excess business loss limitations. Drake Tax applies the basis, at-risk, and passive activity limitations, in that order.
Entering Prior-Year Carryovers in Drake Tax
Enter the applicable prior-year unallowed losses on the Basis tab of:
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Screen K1S for an S corporation
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Screen K1P for a partnership
After entering the carryover amounts, calculate the return.
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For a partnership, review Wks K1P Detail Adj Basis in View/Print mode. This worksheet provides the adjusted-basis calculation and shows the amount of loss or deduction allowed based on available basis.
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For an S corporation, review Form 7203, S Corporation Shareholder Stock and Debt Basis Limitations, and the applicable basis information in View/Print mode.
PYA on Schedule E
When a partnership or S corporation loss was not allowed in a prior year because of the basis or at-risk rules and all or part of that loss becomes deductible in the current year, report the allowable prior-year amount separately on Schedule E, page 2, line 28. Enter PYA in column (a) and the deductible loss in column (i). Do not combine or net the prior-year loss against current-year amounts from the partnership or S corporation.
On Schedule E, page 2:
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PYA appears in column (a).
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The deductible prior-year loss is reported on a separate line.
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The prior-year loss is not combined with or netted against current-year partnership or S corporation amounts.
This can result in both current-year income and a separate PYA loss being shown for the same partnership or S corporation.
Allowed Losses Flow
Prior-year suspended losses retain their character when they become deductible.
As applicable:
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Ordinary business and rental losses reportable on Schedule E flow to Schedule E, page 2.
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Capital gain or loss items retain their capital character and flow to the appropriate schedule, generally Schedule D.
Example
A shareholder has a prior-year ordinary loss that was suspended because the shareholder did not have sufficient basis.
In the current year, the S corporation reports income. That income increases the shareholder's stock basis. If sufficient basis is available after applying the basis rules, some or all of the suspended ordinary loss becomes deductible.
Enter the prior-year carryover on screen K1S > Basis. Drake Tax uses the carryover information and current-year basis calculation to determine the amount allowed. The allowable prior-year ordinary loss is reported separately as a PYA on Schedule E, page 2.
Important Any remaining loss that is still limited by basis continues to be carried forward.