Drake Tax – Loss Carryovers: Overview

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Article #: 19033

Losses may be limited or suspended for several different reasons and carried to a future tax year. The location used to enter or review a loss carryover depends on the type of loss and the limitation that applies. Use the information below to determine where to enter or review the carryover in Drake Tax.

Capital Loss Carryovers

For individual returns, prior-year short-term and long-term capital loss carryovers are entered on screen D2. Drake Tax calculates the amount available to carry forward and displays the calculation on Wks Loss. For more information, see Drake Tax – Schedule D: Capital Loss Carryover.

Passive Activity Loss Carryovers

Losses from passive activities may be suspended when the passive activity loss rules limit the amount currently deductible. Prior-year unallowed passive losses may apply to activities reported on:

  • Schedule C

  • Schedule E

  • Schedule F

  • Partnership Schedule K-1

  • S corporation Schedule K-1

  • Estate or trust Schedule K-1

Passive loss information may appear on Form 8582, Wks PAL, and related activity worksheets. See the following articles for details:

Basis-Limited Losses

Losses from partnerships and S corporations may be limited when the taxpayer does not have sufficient basis. Drake Tax uses the applicable basis worksheet to track deductible and suspended amounts. Losses that are not currently allowed because of the basis limitation may be carried forward until sufficient basis is available. See the following articles for details:

At-Risk Loss Carryovers

Losses may also be limited under the at-risk rules. For activities subject to the at-risk rules, Form 6198 is used to determine the deductible loss. Losses disallowed because of the at-risk limitation may be carried forward and considered in a later year when the taxpayer’s amount at risk increases. For partnership and S corporation activities, Drake Tax can track at-risk limitations and prior-year amounts on the applicable at-risk worksheet.

See Drake Tax – 1040: Partner or Shareholder K-1 At-Risk Losses for details.

Prior-Year Partnership and S Corporation Losses

Previously suspended partnership or S corporation losses may become deductible when the applicable limitation no longer applies. Use the Prior-Year Adjustments (PYA) fields when prior-year amounts need to be reported separately from current-year K-1 amounts. Capital items generally retain their character and flow to the appropriate form or schedule, such as Schedule D. See Drake Tax – 1040: Schedule E, Page 2: Prior-Year Adjustments (PYA) for details.

Net Operating Loss Carryovers

Net operating losses (NOLs) are separate from capital loss and passive activity loss carryovers.

For individual returns, prior-year NOL information is entered on screen LOSS. Drake Tax provides worksheets such as Wks NOL, Wks NOLCO, and Wks CARRY to calculate and track applicable amounts. See the following articles for details:

For corporate NOL information, see Drake Tax – 1120: Net Operating Loss Entries (NOL).

Excess Business Losses

A business loss may be limited by the excess business loss rules. A disallowed excess business loss is generally treated as an NOL carryover to the following tax year. See Drake Tax – 461 – Limitation on Business Losses .

QBI Loss Carryforwards

Qualified business income (QBI) losses are tracked separately from other loss carryovers. Prior-year QBI loss carryforwards may affect the current-year qualified business income deduction calculation. See QBI – Form 8995-A – Schedule C Loss Netting and Carryforward for details.

Nonrecaptured Section 1231 Losses

Net section 1231 losses from the preceding five tax years may affect the treatment of a current-year net section 1231 gain. A current-year net section 1231 gain is treated as ordinary income to the extent of any nonrecaptured section 1231 losses from those prior years. Drake Tax tracks applicable amounts on Wks 1231-C and Wks CARRY. See Drake Tax – 1040: Section 1231 Loss for details.

Estates and Trusts

Capital loss and NOL carryovers for estates and trusts follow different rules from individual returns. Unused capital losses generally remain with the estate or trust until used. Upon termination of the estate or trust, unused capital loss carryovers may pass to qualifying beneficiaries.

See Drake Tax – 1041 – Common Issues for details.

Alternative Minimum Tax

Certain carryover amounts may differ for regular tax and alternative minimum tax (AMT) purposes. This can include capital loss, passive activity loss, and NOL carryforwards. See Drake Tax – Alternative Minimum Tax for details.

Pre-CARES Act carryforwards (decoupled states)

For tax year 2020, some states—including New York and Kentucky—did not adopt all federal changes under the CARES Act (they decoupled from certain provisions). When the federal return applied CARES rules but the state continued to use pre-CARES law, federal and state carryover amounts could disagree. Drake Tax provides Pre-CARES Act carryforward fields on selected federal screens so you can enter or review pre-CARES amounts when a state calculation requires them.

Note Use this section mainly for legacy carryforwards, amended returns, and returns updated from a prior-year Drake Tax database. State conformity changes over time; confirm the state instructions and forms for the tax year you are preparing.

Federal items that were commonly affected when a state decoupled from CARES included:

Where to enter Pre-CARES amounts (1040 package)

On the individual (1040) package, Pre-CARES Act carryforward fields are on:

  • Screen C (Schedule C)—Carryovers/State Info. tab

  • Screen F (Schedule F)—Carryovers/State Info. tab

  • Screen 4835—Carryovers/State Info. tab

  • Screen E (Schedule E)—fields as labeled on the screen

  • Certain K-1 screens—available through the applicable screen link

See Drake Tax – Federal 1040: Screen List for supported forms and screens.

Entity packages

Comparable Pre-CARES Act fields are also available in the Corporation (1120), S Corporation (1120-S), Partnership (1065), and Fiduciary (1041) packages. See:

Returns updated from a prior-year Drake Tax return

If you updated a return from a prior-year Drake Tax installation and Pre-CARES data was already present, you generally do not need to re-enter those amounts; Drake Tax continues to track depleting basis and carryforwards. Enter or change a Pre-CARES field only when an adjustment is required because of a carryforward or other circumstance.

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