My wife just received her 1st K-1 from her S corp

[jeffreymo]

She provided sweat equity and the other 3 partners contributed cash. Her basis =0 and her disallowed loss is X. Her allowable loss is $450 which is her portion of the attorney fees used for setting up the S Corp and other documents.

I've already filed our joint return and don't feel like filing a 1040x and messing with the $450 deduction.

My question is:

I've researched this a little and it appears that the disallowed loss amount (X) will be carried forward, so that if the S corp clears a profit next year we can offset the gain by this amount. Is this correct? Am I missing anything?
I'm most hung up on understanding the basis - does anyone out there have a quick explanation or link (We'll probably hire a CPA to do our return next year but I'd like to have an idea).

[commentator]

$450 x (.25+.05) = $135
Tell you what. Send me your information and I'll complete your 1040X for $100 and send it back to you to sign and mail. If you're tax situation is typical, you'll be $35 ahead and I'll be about $99.25 ahead. (Toner and paper cost something.)

Yes, this disallowed loss can be deducted when your basis increases including an increase from your sharing in profits. You can also increase your basis by investing more money in the S-corp.

The loss you're entitled to but choose not to deduct this year can NOT be carried over for use in a later year.

[jeffreymo]

Thanks commentator. You've changed my mind, I will amend. It will be less than $135, but worth the 30 minutes of my time to complete and mail the 1040X.

And as far as increasing basis: It appears that the company will break-even or show a small profit for 2011. The partners have invested more than their initial start up capital so they are planning on taking distributions in July and December this year. Would my wife need to reinvest this distribution to increase her basis - in other words it would just be a paper transaction? I'm just wondering because right now her capital account is in the negative, because her sweat equity was valued at 1/4 of the initial investment.

Karma to you.

[commentator]

Her basis goes up by her share of profits/gains. Her basis goes down by distributions from the partnership to her. So yes, to keep a large enough basis to use that suspended loss she may have to reinvest some of the distribution.

Thanks commentator. You've changed my mind,

I wish I had thought to use that approach on my kids. "Sure, you can <insert teen age stunt of your choice>, but give me money first." ;D