IRS Issues New Tax Basis Form for S Corporation Shareholders

(Parker Tax Publishing April 2022)

The IRS issued a new form to be filed by certain S corporation shareholders beginning with the 2021 tax year. Form 7203, S Corporation Shareholder Stock and Debt Basis Limitations, is to be used by S corporation shareholders to calculate the potential limitations of their share of the S corporation's deductions, credits, and other items that can be deducted on their individual returns and was developed to replace the 3-part Worksheet for Figuring a Shareholder's Stock and Debt Basis, and its related instructions formerly found in the Shareholder's Instructions for Schedule K-1 (Form 1120-S). Form 7203 and Form 7203 Instructions.

Background

Code Sec. 1366 provides the rules for determining an S shareholder's tax liability with respect to the shareholder's ownership of an interest in an S corporation. Code Sec. 1367 dictates the adjustments that must be made to a shareholder's basis in an S corporation, including the treatment of income items included in basis, the basis of indebtedness, and the basis of inherited stock.

There are potential limitations on S corporation losses that a shareholder can deduct on the shareholder's tax return. These limitations and the order in which they are applied is as follows:

(1) the basis limitations,

(2) the at-risk limitations (Form 6198, At-Risk Limitations),

(3) the passive activity loss limitations (Form 8582, Passive Activity Loss Limitations), and

(4) the excess business loss limitations (Form 461, Limitation on Business Losses).

Generally, the deduction for a shareholder's share of aggregate losses and deductions is reported on Schedule K-1 of Form 1120-S, U.S. Income Tax Return for an S Corporation, and is limited to the basis of the shareholder's stock and loans from the shareholder to the S corporation. The shareholder's stock basis is generally calculated at the end of the corporation's tax year. Any losses and deductions not allowed because of the basis limitation can be carried forward indefinitely and deducted in a later year subject to the basis limit for that year.

The shareholder is responsible for keeping the information needed to calculate the shareholder's stock basis. Schedule K-1 (Form 1120-S) provides information to assist the shareholder in calculating stock basis at the end of each corporate tax year. The shareholder's stock basis is adjusted annually for items of income and expense, as well as distributions and shareholder loans to the corporation.

Form 7203

In December of 2021, the IRS issued a new tax form, Form 7203, S Corporation Shareholder Stock and Debt Basis Limitations, for use by S corporation shareholders to calculate their stock and debt basis. Form 7203 was developed to replace the 3-part Worksheet for Figuring a Shareholder's Stock and Debt Basis and its related instructions formerly found in the Shareholder's Instructions for Schedule K-1 (Form 1120-S).

Beginning with the 2021 tax year, Form 7203 must be filed by S corporation shareholders who:

(1) are claiming a deduction for their share of an aggregate loss from an S corporation (including an aggregate loss not allowed last year because of basis limitations);

(2) received a non-dividend distribution from an S corporation;

(3) disposed of stock in an S corporation (whether or not gain is recognized), or

(4) received a loan repayment from an S corporation.

Practice Tip: Even if a shareholder is not required to file Form 7203, it may be beneficial for the shareholder to complete and retain Form 7203 anyway, to ensure that the shareholder's basis is consistently maintained year after year.

For a discussion of calculating S corporation stock and debt basis, see Parker Tax ¶32,800.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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