Schedule C Net Profit shows as 0 with PAL next to it, even though I earned a profit

Forum|Forum|3 years ago
March 1, 2023
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1) From looking at the 2-year Schedule C comparison report it shows that I had Passive suspended losses last year that negated my profit this year. I have always marked that I am materially participating in my business, so just want to make sure that carrying over the loss from last year is not a problem. I'm actively involved, so the use of PAL concerns me.

2) For my Ohio state taxes does this PAL apply or do I report the actual profit? I would think that the profit should be the same on both federal and state, but just not sure about the use of PAL.

TurboTax Home & Biz Windows

Best answer by AliciaP1

Thank you for looking into this. My token is 1085431.

I went and read the info from the IRS in the link you provided, and what they say is what you advised in your response. It sounds like I should delete Form 8582 p1-p2 and get rid of the PAL on Schedule C. I'm guessing I need to manually update those numbers on the form to get the correct totals since Turbotax is automatically doing the PAL. I've always marked my business as Materially Participated.

Is this the best approach to fix this?

Thanks!

Somehow your 2021 Schedule C income got marked as passive activity. You will need to amend your 2021 return to remove the PAL and recognize last year's loss. You can remove the losses from this year's return so you can continue filing your 2022 tax returns and go back and amend your 2021 at your convenience.

To change this in TurboTax Home & Business you can follow these steps:

Within your tax return, under the Business tab and Business Income and Expenses click I'll choose what I work on
Click Update for Profit or Loss from Business under the Business Income and Expenses section
Click Edit for your business
Scroll down to Special Situations under the Final Details section and click Update
Click Continue
On the Let's get your at-risk loss carryovers screen, delete the amounts in both columns and Continue
Scroll down to Special Situations under the Final Details section and click Update (yes, again!)
Uncheck I have passive activity losses carrying over from 2021
Check None of the above and Continue
Proceed entering/reviewing your return.

@asherbert1

AliciaP1

If you materially participated both this year and last, you should not have passive activity losses (PAL) that are offsetting your active income unless you are in the rental property business but do not have a real estate license. If this is the case, your business activities are still passive and not eligible to offset active income. It can, however, carry forward and offset other passive income.

See PAL from the IRS for more information.

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asherbert1Author

I find it odd that Turbotax automatically does this then. Is this a bug that I should talk with them about? Turtbotax automatically took losses from last year that I couldn't claim and applied them to this year and put the PAL on line 31 of Schedule C.