Business & farm

Follow-up to your response:

• Form 7203 is completed with your personal tax return.
  • This was technically required since you had a distribution from the S corp
  • This also provides a standard basis schedule for the IRS to follow
• Based on your reply, your 2022 1120-S is not correct if you don't have the $50,000 reflected on the M-2.
• This makes sense if it also wasn't reported on the K-1 as you indicated in your original question.
• I can't tell you if the distribution of the $50,000 has no tax implications.  I don't know what else was reflected on the K-1.
• If the $50,000 of ordinary income was the only item reflected on the K-1, then you are correct in that there is most likely no tax implications.
• Correcting a prior year mistake on this years tax return is not really how this should be handled.  Should you win the audit lottery, then that means you have 2 returns that would need to be corrected instead of just the one.
• Additionally, we can't tell you what the implications of "correcting" the distribution in the current year as we have no idea of the S corp income, deductions, distributions etc for 2023.
• My advice is the following
  • I would file an amended 1120-S for 2022.
  • This would allow the beginning AAA to agree to the prior year ending balance
  • You will also need to consider amending your personal tax return if you did not include form 7203 or reflect the distribution on the K-1.
  • Doing so will also ensure that the ending basis reflected on form 7203 agrees to the beginning basis on form 7203 for 2023.  Even if you don't meet the technical requirements requiring you to completed this form, I highly recommend you complete it annually as somehow you need to maintain a basis schedule.
  • Doing the above will minimize any potential red flags