By Cooper Melvin, JD, CPA

The IRS recently released the final version of the new Form 7203 to better document S corporation stock basis in connection with the income tax returns filed by S corporation owners, which can include individuals, certain tax-exempt entities, and certain estates and trusts. While the S corporation basis calculations remain unchanged, the new form requires more detail to document and support the basis calculations. Since the form deals with S corporation stock and debt basis, a misconception by some observers exists that it is filed with the business return 1120S. However, the form will be included in a shareholder’s income tax return if any of the following are true regarding the S corporation:

  1. The shareholder disposes of his/her stock during the tax year;
  2. The shareholder receives a distribution from the S corporation;
  3. The shareholder receives a loan repayment from the S corporation during the tax year; or
  4. The shareholder claims a deduction for the loss.

Furthermore, the IRS recommends filling this form out and saving it for your records even in years where none of the above apply.

The primary purpose of the form is to allow the IRS a better path to follow regarding how shareholders calculate their basis to take losses and calculate potential gains on their 1040s. A notable item on the form related to shareholder debt basis is a disclosure detailing whether shareholder loans are open account debts or formal notes. This part of the form must be completed if shareholders have loaned money to the corporation in any year, not just in the current tax year. If your loan is documented by a formal instrument to the S corporation, then it is considered a formal loan. If it is not documented, then it is an open account loan unless the balance is greater than $25,000. If that is the case, the loan is considered open for the current year but will be classified as a formal note the next year.

As a result of this new Form 7203, BMSS may request more information and support regarding S corporation shareholder stock and debt basis, especially regarding loans from shareholders. If you have any questions about this form and its significance to your business, please contact your BMSS advisor.

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