S Corp shareholders have a new federal form to file

The IRS has always asked S Corp shareholders to attach informal schedules to their tax returns to report their stock and debt. Starting with the returns for 2021, the IRS requires you to attach a new form: the 7203, “S Corporation Shareholder Stock and Debt Basis Limitations”.

The form is required for shareholders reporting a loss or who received an S corp distribution, received an S corp loan repayment, or sold some or all of their stock, said Michael J. Greenwald, CPA, partner and head of corporate taxation. at Friedman LLP in New York.

A 7203 is also required of S corp shareholders claiming a deduction for an S corp loss or loss that was disallowed in a previous year due to basic limitations, Timothy Schuster said. CPA and Senior Executive at EisnerAmper’s Private Business Services Group in Iselin, NJ

“The IRS is trying to standardize the reporting of basic information for a shareholder of an S corporation,” Schuster said, adding that the form replaces the “Three-Part Worksheet for Determining Stock and Debt Basis of the shareholder”.

“So the form is required even for mundane situations like AAA distributions or shareholder loan repayments,” said Nathan Smith, national tax office manager for CBIZ MHM in Clearwater, Florida.

“This is a broad class of transactions that would affect many shareholders of S corporations,” added Kevin Powers, partner at Crowe LLP in Simsbury, Connecticut. “The IRS is casting a pretty wide net.”

Why now?

“The IRS is serious about core issues, both for S Corporation shareholders and LLC partners/members,” Greenwald said. “They believe that because the base is not accurately tracked, losses are inappropriately deducted and distributions in excess of the base escape tax.”

Smith added: “Interestingly, there is no comparable disclosure requirement for partners who hold interests in the partnership. This may be because K-1s issued by partnerships are now required to disclose tax capital information to each partner. [and this information] arguably provides information comparable to the basic information on Form 7203.”

Powers added that shareholders are advised to follow their base in S corporation stock and debt. [but] the IRS did not formally require shareholders to report this basis with their personal tax returns until 2018.

One of the advantages of using the form is the ability to separately identify the base of different stock blocks. “For example, a taxpayer may have acquired S Corporation stock directly and by inheritance from a relative or subsequent purchase from another shareholder,” Greenwald said. “The ability to establish a separate base for each block of shares may result in less gain on partial share sales because the higher base shares can be identified as those sold.”

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