S-Corporation Basis and Form 7203
Presented By Jason Dinesen (EA, LPA)
Introduction
• This webinar is all about calculating basis of an S-corporation shareholder
• And a look at Form 7203
• Standard disclaimer: this webinar is not tax advice; always seek appropriate counsel before making final decisions
What is Basis?
• Basis is essentially a partners’ stake in a partnership, and a shareholders’ stake in an S-corporation.
• If we only had one slide to define basis, I would say this:
• Basis is the money and property put into the entity, minus withdrawals from the entity (such as distributions), plus net income from the entity, minus net losses from the entity.
What Do We Do With It?
• Basis determines a number of things:
• Whether or not distributions are taxable
• Whether or not losses from the entity are deductible
• Gain or loss the taxpayer has when they dispose of their ownership in the entity
S-Corporation Basis
Ordering:
• Increase basis by items of income from the K-1
• Then subtract distributions
• Then subtract non-deductible expenses such as the 50% nondeductible portion of meal expenses
• Then subtract ordinary losses
S-Corporation Basis
• One twist:
• S-corp shareholders can make an election to change the order of losses, to account for ordinary losses BEFORE non-deductible losses.
• This can help a shareholder be able to use more of a loss in the current year.
• But once this election is made, it is irrevocable without consent from the IRS.
• Making this election is usually beneficial to the taxpayer and doesn’t seem to have many downsides
S-Corporations and Debt
• Entity debt (i.e. debt taken on by the S-corp itself) does NOT increase shareholder basis. Note that is different from partnership basis rules.
• S-corp shareholders get no increase in basis at all (at-risk or otherwise) from entity debt.
• One exception: loans from the shareholder to the corporation.
Tracking Basis
• It is the shareholder’s responsibility to track basis, not the responsibility of the entity.
• In practicality, the entity will often track basis, but the responsibility for ensuring the basis is correct lies with the individual.
• Remember, items that go into basis are determined at the entity level, but the impact of basis is felt at the individual level on their 1040.
Partnerships and Basis
• A partnership is NOT required to track a partner’s basis
• Form 7203 is specific to S-corps
• However, partnerships are now required to track, and report on the K1, a partner’s capital account on a tax basis. The capital account will sometimes match a partner’s basis (and sometimes not)
Form 7203
• If you’re familiar with basis worksheets, either provided by the IRS or in various guidebooks, Form 7203 is set up exactly like those worksheets
• One complication: if a shareholder has multiple loans and is receiving multiple paybacks on those loans, each loan needs to go on a separate column; your presenter has found this sometimes requires manual overrides in the software to get everything to tie out
• Also watch if there are multiple lots of stock
Basis and Audits
• Taxpayers deducting losses in excess of basis is listed on the IRS list of audit initiatives: https://www.irs.gov/businesses/corporations/lbi-active-campaigns
• Specifically S-corporation shareholders deducting losses in excess of basis:
• “LB&I has found that shareholders claim losses and deductions to which they are not entitled because they do not have sufficient stock or debt basis to absorb these items. LB&I has developed technical content for this campaign that will aid revenue agents as they examine the issue. The treatment streams for this campaign will be issue-based examinations, soft letters PDF encouraging voluntary self-correction, conducting stakeholder outreach, and creating a new form for shareholders to assist in properly computing their basis.”
Basis Impact
• Calculate basis, and then limitations on losses are taken into consideration based on the following order:
1. Basis limitations
2. At-risk limitations
3. Passive activity limitations
4. Excess business loss limitations
Types of Loans
• Total loan amounts of $25,000 or less, per shareholder, can be treated as open account debt – does not need to be evidenced in writing
• Additional advances, and repayments, are netted together during the year on this type of loan
• Determination of potential capital gain on repayments is the same as shown previously
Open Account Loans
• Joe loans his S-corp $15,000 this year
• Less than $25,000 – can treat as open account debt
• Joe takes a debt basis of $15,000
• Next year, Joe puts another $1,000 into the corporation as a loan, and receives $4,000 of repayments from the corporation
• Net these two together – Joe receives a net of $3,000 repayment from the Scorp; capital gain on the $3,000 (if any) is calculated by looking at his debt basis versus the total amount of open account debt
Reconstructing Basis
• What do you do if you/the taxpayer/the prior preparer never tracked basis?
• This is quite common
Thank you! Questions???
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