Help with Form 7203 S Corp Shareholder Stock and Debt Basis Limitations

I'll answer your questions by your numbers:

1. Your basis calculation represents the value of the stock you own.  It is not difficult to do, but it is a running total from day one.  Until 2021, it has been each shareholder's responsibility to track their own basis but it was not required to be reported.  Please see S Corporation Stock and Debt Basis for details and the method for the calculation.
2. Since your original intent of the infusion was to pay yourselves back without interest and did not formally document the note and terms, you have "Open Account Debt" that is being paid back.
3. The link provided above has the information you need to identify the amounts you need for the calculation.  Although, your mention of the "Partner's Capital Account Analysis section L of the K-1" references the K-1 for a Form 1065 Partnership Return rather than the K-1 Form 1120-S you would have for an S-Corp.  You need to ensure your business has filed the correct returns and elections.

Thank you @AliciaP1 ,

Is it possible to have a phone call with you? I am willing to pay a fee if necessary so I can properly fill out the Form 7203. I want to make sure I have the basis correct from 2019 to present.  I am trying to follow the instructions from the link you provided to create basis for 2019 & 2020 so I can then calculate 2021.  However, the shareholder loan part is so confusing! 

1) The loan did not affect the S-Corp P&L.  It is a balance sheet item, so it's not like the loan increased or decreased the Ordinary business income (loss) that passes onto the K1.  If that's the case does it affect my basis?  More details are below.

2) In 2019 (our first tax year), we infused cash for start-up expenses.  The 2019 K1 does not have a Box H ("Loans from Shareholders"), nor do I see a "Numbered" Box on that 2019 K1 reflecting the loan amount.  So for the 2019 basis, do I include the loan in the basis? Does the loan increase or decrease the basis? 

3) The 2020 K1 in box H shows "loans from shareholder" with a beginning balance (showing 2019 loan amount) and ending balance (total of 2019+2020 amounts). But again I don't see a numbered Box with the loan amount(s).

4) The 2021 K1 Box H shows a beginning balance and an ending balance of $0, because the loan was paid back to the shareholder in 2021, and that paid back amount is reflected in Box 16E of the K1 "Items affecting shareholder basis.  My understanding this loan repayment is what prompted TurboTax for the Form 7203.

5) Based on the helpful link you provided, I think I can figure out where to plug everything but don't know if I should include or what line of the 7203 to include the loans for the 2019 and 2020 basis calculations...

Many thanks, and I would welcome a phone conversation with you if possible!

I'm only available on this forum, but I'll do my best to answer your questions here!  

1. While your loan does not affect the company's P&L, it does affect your basis.  The amount you invested as a loan becomes your beginning basis.
2. Yes, the loan is still your beginning basis even if it wasn't reported as a loan the first year.  The ending basis is the loan amount plus any income or less any loss the company reported on your K-1.
3. Since you invested more (increased your loan amount) in 2020 there should be an increase in your basis for 2020 of that amount as well as any income increase or loss deduction for the year's activities.
4. The payback of the loan will reduce your basis by the total amount, but only down to $0, your basis cannot be negative.  And yes, this is why you have to complete Form 7203 now.  You will also report any income increases or loss decreases for the year.

Hi @AliciaP1 yesterday I was about to submit my personal returns when a final check made this new required form pop up for our S-Corp.  Today I reached out to our S-Corp accountant who provided their basis worksheet.

What do I enter in "Stock Block?" We are a two person S-corp, never issued additional stock nor acquired another company. Googling didn't help. 

Thanks in advance

A stock block is a group of stocks purchased (or allocated as you have stated) at 1 time.  So, in your case, you have 1 stock block.  If you had the initial allocation and had then purchased another group later, you would have 2 stock blocks.

@AdamAsks

Hi @AliciaP1,

I'd like to know if you can help me with my similar circumstance: https://ttlc.intuit.com/community/business-taxes/discussion/how-to-calculate-cumulative-shareho[product key removed]-1-and-2-of-the-new-7203-forms-to-take-s-corp/00/2659350#M87898

How to calculate cumulative shareholder bases (lines 1 and 2 of the new 7203 forms) to take S Corp losses this year? We have K-1s and 1120-S forms going back 16 years.

Note: TurboTax's new 7203 form is reporting zero for lines 1 and 2. I did not enter these numbers.

Another question is about line 35: losses for this year (column a) and last year (column b - carryover). Shouldn't the carryover amount include losses from two or more years ago? According to IRS prior year's carryover was supposed to be on the worksheet that preceded 7203. However, Turbotax never sent me that worksheet.

Since this is a brand new form for 2021 and your basis was not required to be reported to the IRS prior to this year, there's no true historical record in any software.  TurboTax Online brings up the form in the interview process so you can complete the form as you need with the additional information from your personal tracking.  Any carryovers should report all that are still outstanding and yet to be claimed as a loss.

See S Corporation Stock and Debt Basis and Instructions Form 7203 for more specific information on completing the form.

@GeneMiller

Thank you, @AliciaP1 

I was able to follow the example in https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-stock-and-debt-basis. However, I don't see how it applies to my situation.

ASSUMPTIONS
Let's say I put in $0 when the company was incorporated and S-corp was elected.  So my initial basis is $0. So Form 7203 line 1 (Stock basis at the beginning of the corporation’s tax year) is 0.

Now, in the first year, the company reports 1,000 in income and 5,000 in expenses. The reported loss is 4,000.

However, in order to cover the expenses, I give the company 4,000 from my pocket.

QUESTIONS ABOUT FORM 7203
What is the change in the basis for year 1?
Q1. Does the 4,000 I laid out for expenses get added to the basis?
If yes, then which line does it get added to?
Does it get added to line 2 (Basis from any capital contributions made or additional stock acquired during the tax year)?
Q2. I assume the 4,000 loss is reported in line 3a and subtracted from the basis. Right?

QUESTIONS ABOUT K-1
Assume my K-1 for year 1 currently shows the following:
Line 1 Ordinary business income (loss) = -4,000
Checked "materially" participated in the business activities
Lines 2 through 16 = 0
Line 17V Section 199A information = -4,000.
Q3. Do I need to report somewhere the 4,000 expenses paid from my pocket?

QUESTIONS ABOUT 1040
I answered yes to "materially participated" and "at-risk"
Q4. Can I report the -4,000 loss because my stock basis is 4,000?

On 7203- yes you need to add the 4000 to your contributions (increase) in basis and this is what allows you to take the 4000 loss.  So, your basis at the end of year 1 is still 0.

Just report your K-1 as shown since you contributed to your basis to cover the loss.  This will populate the 1040 accurately with your allowable loss based on your whole tax situation.

@GeneMiller

Thank you @AliciaP1. This clarifies a lot.

Now, please confirm this for Form 7203:

• Line 1 Stock basis at the beginning of the corporation’s tax year: 0 (assuming 2020 similar to 2021)
• Line 2 Basis from any capital contributions made ... during the tax year: 4,000 (2021 loss)
• ...
• Line 11 Allowable loss and deduction items. Enter the amount from line 47, column (c): 4,000 ??

Unfortunately, I don’t understand the instructions for Line 47 column(c) “enter the pro-rata amount on the corresponding line in column (c)” (https://www.irs.gov/pub/irs-pdf/i7203.pdf)

Please confirm these assumptions for Line 47:

• column (a) Current year losses and deductions: 4,000
• column (b) Carryover amounts from the previous year: 0 (assuming 2020 was similar to 2021)
• column (c) Allowable loss from stock basis: 4,000 (is this the pro-rata amount?)
• column (d) Allowable loss from debt basis: 0
• column (e) Carryover amounts: 0

Best regards,

Gene Miller

For line 47 column (c), yes, this is the pro-rata amount.  That result would be different if you had carryforward losses from previous years because they would be identified in column (b) and added to column (a) current year losses.  If the total was more than your current year basis, the amount in column (e) would have the amount of your 2021 carryover into 2022.

@GeneMiller

Thank you for the clear answer!

I also am struggling with this new form, 7203.  My issue is that my company is set up as an LLC but we have chosen to be considered a disregarded entity and file as an S Corp.  There never has been stock.  My wife and I are considered a single member LLC.  This form does not seem to fit that business setup?

@Tentmakers

If you have not taken the S-Corp election for your LLC, the IRS considers you and the company to be one taxpayer. In this case, Form 7203 would not apply.

If, however, you have elected to be taxed as a corporation (S-Corp), your LLC must file a separate business tax return (Form 1120-S) to report the income and expenses on Schedule K-1. In this case, you would use the information from all Schedule K-1s since inception to complete Form 7203.

How do I determine the Stock Block?

A stock block is a group of stocks purchased (or allocated as you have stated) at 1 time.  So, in your case, you have 1 stock block.  If you had the initial allocation and had then purchased another group later, you would have 2 stock blocks.

See S Corporation Stock and Debt Basis for more details on how to track your basis for the form.

@Marwick3183

@AliciaP1 I am using turbotax business and this question is regarding Part II shareholder debt basis in shareholder basis worksheet.

I have loaned amounts in the range of 5000 to 6000 a year over the last 7 years. There is no special written instrument for these loans and since the amounts are in the range of 5000 to 6000 I am treating these as  7 Open account debts. The shareholder basis worksheet simply says "If more than three debts, see instructions".   IRS instruction says "If you have more than three loans, use additional copies of Part II.".

I am trying to figure out how turbotax business supports adding additional part IIs. Although I don't think this is the solution, I tried adding a new shareholder basis worksheet and it says: "NOTE: TO CREATE A NEW SCH K-1, ENTER THE SHAREHOLDER'S INFO ON SCH K-1 WKS" - implying that only one shareholder basis worksheet can be attached to one share holder. So the question is how do I add additional part IIs exceeding three "open account debts" in turbotax business?

@AliciaP1 Anticipating a recommendation to add all these as a single debt, I just want to add to my previous post that the numbers 5000 to 6000 are fictitious numbers I gave to frame the question. I am really interested in learning how to add additional Part IIs for my actual loan amounts resulting in more than 3 debts. Thanks

In technical terms, if you loan amounts over years that do not have separate formal terms, you are considered to be increasing the same loan amount each year.  Another way to think of it is:

• Customers with Open Account Balances do not create new accounts each time they make a purchase - their Open Balance just increases
• You are considering the loan an Open Account Debt - so each year's loan should just be added to the Open Account Debt and you only have 1 account for the debt

Per the rest of the IRS instructions you quoted:

You must complete this section if you have personally loaned money to the corporation. 

You must account for each formal note (notes with a written instrument) made to your S corporation by entering it separately in its own column. You can’t aggregate multiple loans into a single column. If you have more than three loans, use additional copies of Part II. 

Loans made to the S corporation that aren’t evidenced by a written instrument are referred to as an open account debt and aren’t separately tracked. If an open account debt has a year-end balance of more than $25,000, it will be classified as a formal note at the beginning of the next tax year and must be separately tracked.

@rachetech

@AliciaP1 Thank you for your explanation. My question is really turbotax specific and not related to treatment of open account debt vs formal note. I am aware of Brooks v. Commissioner, TC Memo. 2005-204 and the subsequent Treasury regulations it triggered.

Your response does touch on something that I had acknowledged in my post i.e. to submit additional part IIs when there is more than three debts to report. My question is how does one go about creating additional Part IIs in turbotax? I am not able to create additional Part IIs in turbotax. If you could provide me the steps it will help. I am using turbotax business.

Thanks

My point is you cannot and should not if these are indeed Open Account Debt amounts.

Also, a Form 7203 is only reported on a personal return so, I'm assuming you mean you are using TurboTax Home & Business.

@rachetech

Hello! Our form 7203 line 3 has values in 3a and 3d, no others except 3m. The 3m row looks odd as it seems to be the total of 3a and 3d which seems to double count things in line 4 which sums up 3a through 3m. This makes the stock basis before distributions too high. Then the form seems to subtract out the distributions more than once - on line 6 and also in line 13. Do you know if I may have entered something incorrectly?

@AliciaP1  I'm also having trouble with Form 7203.   We started our S Corp mid year and capitalized it with $1600.  It is just my wife and I with 51/49% split.  Since then we've funded ongoing expenses on an open book (expense report) basis to the tune of about $7k to year end.  We had $0 income.  

I'm getting told line 3a (which is 0) "cannot have a gain in Part I and a loss in Part III" 

I thought the idea was that Part I is only for gains, and Part III is only for losses?  How can that error make sense? 

I don't like that it tells me to input only (negative) loss on lines 35-46.  I'm an engineer...just tell me to put the actual number value in or tell be to put the absolute value or modulus in the cell.  Who thinks these instructions make sense?   Anyhow my main problem is understanding the error message above, any help will be much appreciated. 

The only thing I can suggest here is to review your entries because it does seem like something is entered wrong.  There have been no other reports of math errors on the form and I have not encountered any with my testing myself.

Go back to your K-1 entry and progress through to the Form 7203 screen and ensure you have not entered any amounts into line 3m or 13 that are not duplicates of the other lines.  Be sure to click Refresh Calculations before you Continue past the page.

@ESG S-Corp