S Corp Loss not claimed and Form 7203

[MD68]

Questions:

I know that allowable loss claimed on my 1040 is limited by my basis in the S-Corp; however, do I HAVE to claim the loss? If I don't claim any of it, does the full loss carry over to the next year or only the part that exceeds the allowable loss? Similarly, would my basis not be reduced if I don't claim the loss?

Details:

As TurboTax has had us fill out Form 7203 manually, I've used it to go back a few years to the beginning of my S corp (1 shareholder) to properly track my basis. In year 1, there were no capital contributions (stock basis = 0) but there was a net $600 open account debt. The year ended with a $5,000 ordinary business loss (no other losses/deductions). Form 7203, line 47 (d) "Allowable loss from debt basis" tells me that I can claim $600 loss on my 1040. But, for whatever reason, I DID NOT claim this $600 loss on my 1040. Year 2 was similar: increased debt basis, had S corp loss but did not claim any loss.

The instructions for line 47 (d) say, "line 47, can’t exceed the amount reported on line 29" which is the "debt basis before losses and deductions" ($600 in my case) but can it be less? Can I simply write $0 to reflect that I actually didn't claim a loss on my 1040? The answer to this question clearly affects my carryover for the next year (column e), my debt basis at the end of the year (line 31) and the future amount of nontaxable debt repayments (line 25).

Thank you

[Mike9241]

yes, you have to report the loss.  this is so you won't have problems in the future should there be an increase in basis due to profits, loans, or additional capital contributions. use form 6198 to limit loss to basis. the 7203 doesn't seem to work. you also have to check the not all "at-risk" box for the k-1

[MD68]

I'm not sure what you mean by "report the loss".

Do you mean that I have to put the loss on my forms? Yes, my K-1 shows the business loss. My form 7203 shows the business loss.

Do you mean that I have to claim the loss on my personal taxes (allowed by basis)? I don't know why you HAVE to; it only reduces my tax liability which I don't think the IRS cares if you miss a deduction.

Do you mean that I have to write in line 47 column d the maximum debt basis ($600) and I can't write less ($0)? Thus I have to accept the loss of basis and accept that I can't carry over all losses whether I claimed the business loss or not on my personal taxes.

[Rick19744 · Accepted solution]

Responses to your questions:

• As noted by @Mike9241 you need to either report income or claim a loss in the year that it was received or incurred the loss.  The reason for this is simple......the IRS doesn't want taxpayers to report income or loss in any year they chose.  Too much opportunity for manipulation of income.
• As open account debt, these are not tracked separately until they exceed $25,000.
• Yes you should include the $600 on Form 7203 Part II.
• Form 7203 is only an informational form.  The form was developed so the IRS could have some consistency in how S corp basis schedules were maintained.
• In order to have TT utilize the $600 on your tax return, you will need to complete Form 6198 and link it to the S corporation K-1.
• Additionally, since this was in a prior year, you would have to amend that years tax return in order to benefit from the debt basis; no carryover.
• With open account debt, which is no different from a formal note debt, you need to restore this back to the $600 before you can repay it.  The difference between open account debt and a formal note debt, is that if you repay open account debt with a reduced basis (such as yours "0"), this will be deemed ordinary income to you.  With a formal note, repayment of reduced basis debt is deemed capital gain.
• Using debt in an S corp can be messy.

[MD68]

Thank you so much for the clarification.

[Rick19744]

You are welcome.