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

[Marwick3183]

How do I determine the Stock Block?

[AliciaP1]

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

[rachetech]

@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?

[rachetech]

@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

[AliciaP1]

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

[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

[AliciaP1]

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

[ESG S-Corp]

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?

[JohnnyEuro]

@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. 

[AliciaP1]

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

[AliciaP1]

Your initial investment counts as a contribution and should be reported on Part I line 1 for each K-1.  If the additional $7k was loaned to the business this is reported in Part II as Open Account Debt.  If the $7k is considered additional contributions, it should be added to the amount on Part 1 line 1.

The only amount you should list in Part III is line 35 for the ordinary business loss.

This should correct your error.  TurboTax has had a few instances when your error was received and my listed corrections made, but the error does not clear.  If this happens to your return, you will have to delete the K-1 and re-enter the information, making sure to report the 7203 information as I have listed here.

To delete your K-1 in TurboTax Online you can follow these steps:

1. Within your return in TurboTax Online search for K-1.
2. Click the Jump to link in the search results.
3. Click Continue then Edit for your S-Corp K-1.
4. Delete the K-1 line(s) with the trash can icon.
5. Click on Tax Tools on the left side of the screen.
6. Click on Delete a Form. 
7. Scroll down to your K-1 and click Delete if they are still there.

@JohnnyEuro

[JohnnyEuro]

I've checked my entries and confirmed that Part I and Part III will not accept values less than 0.  So truly the "modulus" of the value is wanted.  

Line 3a has $0.  Line 36 has $3567.  

What does the message mean?  "Form 7203: Line 3a cannot have a gain in Part I and a loss in Part III."  

I do not have a gain in Line 3a.  Furthermore Line 3a doesn't actually exist in Part III so is this message trying to tell me it doesn't like my value in Line 36?

 

[JohnnyEuro]

Thanks.  I think your reply was on its way to me when I was preparing another question for you.  I'll give this a try. 

[mppatt01]

For an LLC that has taken the S-Corp election, is every equity increase event a block?  

[AliciaP1]

No, only stock purchases are blocks.  You can contribute to the S-Corp without purchasing more stock.

@mppatt01