The IRS has always had S Corp shareholders attach informal schedules to their tax returns to report their stock and debt basis. Starting with returns for 2021, the IRS mandates attaching 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 a distribution from the S corp, received a loan repayment from the S corp or sold some or all of their stock, said Michael J. Greenwald, a CPA, partner and business tax leader at Friedman LLP in New York.
A 7203 is also required from shareholders of an S corp who are claiming a deduction for a loss from an S corp or a loss that was disallowed in a prior year due to basis limitations, said Timothy Schuster, a CPA and senior manager in EisnerAmper’s Private Business Services Group in Iselin, N.J.
“The IRS is attempting to standardize reporting of basis information for an S corporation shareholder,” Schuster said, adding that the form replaces the three-part “Worksheet for Figuring Shareholder’s Stock and Debt Basis.”
“So the form is required even for mundane situations like AAA distributions or shareholder loan repayments,” said Nathan Smith, director for CBIZ MHM’s National Tax Office in Clearwater, Fla.
“This is a broad category of transactions that would affect many S corporation shareholders,” added Kevin Powers, a partner at Crowe LLP in Simsbury, Conn. “The IRS is casting a rather wide net.”
Why now?
“The IRS is serious about basis issues—both for S Corporation shareholders and partners/LLC members,” Greenwald said. “They believe that because basis is not accurately tracked, losses are being deducted inappropriately and distributions in excess of basis are escaping taxation.”
Smith added, “Interestingly, there is no comparable disclosure requirement for partners that hold partnership interests. This is possibly because K-1s issued by partnerships are now required to disclose tax basis capital information to each partner [and this information] arguably provides information that is comparable to basic information on Form 7203.”
Powers added that it’s advisable for shareholders to track their basis in S corporation stock and debt [but] the IRS didn’t formally require the shareholders to report this basis with their personal tax returns before 2018.
One advantage of using the form is the ability to separately identify the basis of different stock blocks. “For example, a taxpayer may have acquired stock in the S Corporation directly and by inheritance from a relative or subsequent purchase from another stockholder,” Greenwald said. “The ability to establish a separate basis for each stock block may result in a smaller gain on partial sales of stock since the higher basis shares may be identified as those sold.”