Part II

Income or Loss From Partnerships and S Corporations If you are a member of a partnership or joint venture or a shareholder in an S corporation, use Part II to report your share of the partnership or S corporation income (even if not received) or loss.

at-risk rules, and passive activity loss rules to your loss on Schedule E.

If your loss is also subject to the excess business loss rules, you figure that limitation separately on Form 461. Any reduction to your loss due to the excess business loss rules will not be reflected on your Schedule E. See the Instructions for Form 461 for more information.

Basis rules for partnerships. Generally, you may not claim your share of a partnership loss (including a capital loss) to the extent that it is greater than the adjusted basis of your partnership interest at the end of the partnership’s tax year. Any losses and deductions not allowed this year because of the basis limit can be carried forward indefinitely and deducted in a later year subject to the basis limit for that year. To figure the basis of your interest in a partnership, you can use the Worksheet for Adjusting the Basis of a Partner’s Interest in the Partnership in the Partner’s Instructions for Schedule K-1 (Form 1065). For more details on the basis rules for partnerships, see Pub. 541.

If you had a loss from a partnership that was not allowed last year because of the basis rules, but all or part is allowed this year, see Line 27 , later, for how to report it.

After applying the basis rules, the loss you report on Schedule E may be further reduced by the at-risk rules and passive activity loss rules.

Basis rules for S corporations. Generally, the deduction for your share of aggregate losses and deductions reported on Schedule K-1 (Form 1120-S) is limited to the basis of your stock (determined with regard to distributions received during the tax year) and loans from you to the corporation. The basis of your stock is generally figured at the end of the corporation’s tax year. Any losses and deductions not allowed this year because of the basis limit can be carried forward indefinitely and deducted in a later year subject to the basis limit for that year. To figure your aggregated stock basis, you can generally use Form 7203. For more details on the basis rules for S corporations, see the Instructions for Form 7203.

If you are claiming a deduction for your share of an aggregate loss (or you receive a distribution, dispose of stock, or receive a loan repayment from an S corporation), check the box on the appropriate line in Part III, column (e), and attach Form 7203 to your return.

If you had a loss from an S corporation that was not allowed last year because of the basis rules, but all or part is allowed this year, see Line 27 , later, for how to report it.

After applying the basis rules, the loss you report on Schedule E may be further reduced by the at-risk rules and passive activity loss rules.

At-risk rules. If you have (a) a loss or other deduction from any activity carried on as a trade or business or for the production of income by the partnership or S corporation, and (b) amounts in the activity for which you are not at risk, your loss may be limited. For more information, see At-Risk Rules, earlier.

If you are subject to the at-risk rules for any activity, check the box on the appropriate line in Part II, column (f), of Schedule E, and use Form 6198 to figure the amount of any deductible loss. If the activity is nonpassive, enter any deductible loss from Form 6198 on the appropriate line in Part II, column (i), of Schedule E. If you had a loss from the partnership or S corporation that was not allowed last year because of the at-risk rules, but all or part is allowed this year, see Line 27, later, for how to report it.

After applying the at-risk rules, the loss you report on Schedule E may be further reduced by the passive activity loss rules.