Form 7203 line 34 shows a Gain on loan repayment. This is for repayment on open account debt. Where to report this on?

[gretch]

This is a duplicate of another question, that incorrectly stated it was for 2024 taxes. Should be 2023 taxes.

My K-1 shows that $500 was repaid on an open account debt. I completed form 7203 and line 34 shows a gain on loan repayment since I had used the entire debt as basis against a prior years loss carryover. IRS instructions say this should be reported on form 4797. But I can find no example of where and how to put the $500 on form 4797 and Turbo Tax is not doing this automatically for me. Any thoughts would be appreciated.

[Mike9241]

there isn't enough data to give you a definitive answer.

first if the S-Corp had income for the year that restores tax basis in the debt before repayment.

is the debt  actually open-account debt? 

On October 20, 2008, the IRS issued final regulations on open account debt. The regulations define the term “open account debt” as shareholder advances not evidenced by separate written instruments and repayments on the advances, the aggregate outstanding principal of which does not exceed $25,000 of S corporation indebtedness to the shareholder at the close of the S corporation’s tax year. The regulations also provide that advances and repayments on open account debt are treated as a single indebtedness.

Under the final regulations the determination of whether the threshold balance of $25,000 is exceeded will generally be made at the end of the tax year of the S corporation. However, if all or part of the open account debt is disposed of before then, the final regulations require the determination to be made immediately before the disposition of the debt during that tax year. 

The new regulations are effective October 20, 2008, and apply to shareholder advances and corresponding repayments made on or after that date. They do not apply to open account debt that is outstanding prior to October 20, 2008, or to corresponding repayments on that debt. 

The final regulations do not address the character of gain on the repayment of unwritten advances that do not qualify as open account debt under the regulations. However, it appears that the treatment of unwritten advances exceeding $25,000 as being evidenced by a separate written instrument is only for purposes of determining the timing and amount of gain recognized on repayment. Accordingly, it is likely that gain recognized on the repayment of such debt will be ordinary. Shareholders should consider evidencing all loans made to their S corporations in writing; gain on the repayment of a debt that is evidenced by a written instrument should generally be capital gain.

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if the S-corp had income for the year, in form 7203 you must manually adjust the restoration of basis, Turbotax does not do it

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you are correct the 7203 does nothing to carry the recapture to form 4797.

the workaround

select sales of business property

continue

[Mike9241 · Accepted solution]

there isn't enough data to give you a definitive answer.

first if the S-Corp had income for the year that restores tax basis in the debt before repayment.

is the debt  actually open-account debt? 

On October 20, 2008, the IRS issued final regulations on open account debt. The regulations define the term “open account debt” as shareholder advances not evidenced by separate written instruments and repayments on the advances, the aggregate outstanding principal of which does not exceed $25,000 of S corporation indebtedness to the shareholder at the close of the S corporation’s tax year. The regulations also provide that advances and repayments on open account debt are treated as a single indebtedness.

Under the final regulations the determination of whether the threshold balance of $25,000 is exceeded will generally be made at the end of the tax year of the S corporation. However, if all or part of the open account debt is disposed of before then, the final regulations require the determination to be made immediately before the disposition of the debt during that tax year. 

The new regulations are effective October 20, 2008, and apply to shareholder advances and corresponding repayments made on or after that date. They do not apply to open account debt that is outstanding prior to October 20, 2008, or to corresponding repayments on that debt. 

The final regulations do not address the character of gain on the repayment of unwritten advances that do not qualify as open account debt under the regulations. However, it appears that the treatment of unwritten advances exceeding $25,000 as being evidenced by a separate written instrument is only for purposes of determining the timing and amount of gain recognized on repayment. Accordingly, it is likely that gain recognized on the repayment of such debt will be ordinary. Shareholders should consider evidencing all loans made to their S corporations in writing; gain on the repayment of a debt that is evidenced by a written instrument should generally be capital gain.

If there is income Turbotax should automatically use the income to restore debt basis

wage an income section

sale of business property start or update

no on next screen - held more than 1 year

yes on next screen you sold property held less than 1 year

select held one year or less on next screen

continue

enter data for description  something like repayment of reduced basis s/h debt

date acquired use 1/1/2023 

date sold 12/31/2023

these dates are sort of required so it does not appear the holding period was more than 1 year. 

[gretch]

Thank you for the instructions for including the gain on 4797. That is what I was looking for.

The debt is under $25,000 and is a continuing account where sometimes I loan the business cash for a shortfall and when the business has caught up, they pay me back. I did not loan anything in 2023, but there was a balance from 2022. They paid me back $500 in 2023. Thus the balance on line 34.

I have a significant amount of suspended carryover losses due to basis limitations. I used all of the debt basis last year (2022) so have 0 for debt basis beginning this year. Turbo Tax put the current year (2023) income for the S-Corp as additional stock basis, which I used against some of the carryover losses.

Your answer did point me to one item that I hadn't realized before - that is when the net of all income, deductions, distributions and losses is positive, debit basis is restored before stock basis.

Again, thank you for your time and your answer.