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

[rqualls]

Think about the Stock Blok blank as a placeholder for your type(s) of interest with the S Corp.  It does not feed into anythinng else.  More of an information field.

[yoadrienne6]

Argh... last minute help, please!

I think I understand most of Form 7203.... 2 questions:
1) For Parts 2 and 3 (parts that reflect deb): Should we be putting a "-" sign in front of the amounts? Part 2 is a debt section, so I'm not sure if that will indicate a double negative and therefore calculate it as a +.

2) Part 3, column b instructions: "Enter any loss or deduction items disallowed due to basis limitations in prior years that were carried forward."  How would I know if any amount was disallowed in prior years? On Schedule M-2 of my Tax Return, I've been carrying over our S Corp losses from year to year. I don't know how to determine how much, if any, the IRS didn't allow.

MANY THANKS!!!

[AliciaP1]

I'll answer by your question numbers:

1. No, Part II should be entered as positive numbers and calculated according to the line directions.
2. As a shareholder you are responsible for tracking your basis and limiting any losses you take in a year to your calculated basis at the end of the year.  It is a rolling calculation from year to year.  The best way to determine where you are at is to calculate your basis for prior years outside of TurboTax and verify your beginning balance for 2021 and any carryover losses that are left to report.

@yoadrienne6

[yoadrienne6]

@AliciaP1 Thank you SO much! So Column B is not the business loss carryover from prior years that is on Schedule M-2? Or could it be the same?

Point is, I'm trying to figure out what the formula for Col B is ... I do not know what " any loss or deduction items disallowed due to basis limitations in prior years" means.  I DO have my total losses/deductions carried forward each year... but how do I know if they were disallowed? (as in what is the definition of "disallowed" in this very specific context)?)  Thank you!

[AliciaP1]

Correct, the form is only showing one year at a time so it's not circular.  Each year the carry forward just rolls into your basis total.

@yoadrienne6

[yoadrienne6]

@AliciaP1  Thank you! I actually edited my question a few minutes after I sent it, but I can see that you didn't receive the update.

Here's my edited question (I realized after I first posted that the circular issue wasn't my initial question with Col B): 
"Point is, I'm trying to figure out what the formula for Col B is ... I do not know what " any loss or deduction items disallowed due to basis limitations in prior years" means.  I DO have my total losses/deductions carried forward each year... but how do I know if they were disallowed? (as in what is the definition of "disallowed" in this very specific context)?)  Thank you!"

[AliciaP1]

The "disallowance" happens on your personal return and affects your basis - not from the business side.  When you calculate your first year's basis the ending, after the income or loss that was reported on your K-1, as well as any distributions reported, will add to or reduce your basis.  If your basis gets reduced below the amount of the loss or distribution reported in a future year and you do not make any contributions to increase your basis, your losses are now disallowed and become carryover losses until your basis is raised enough to take the losses. 

For example:

• If your initial stock purchase was $10,000 and your first year K-1 reported a $5,000 loss, your ending basis is $5,000, and, ignoring any other income/loss on your personal return, your full loss is allowed.  
• In the second year, your K-1 reported a $7,000 loss with no contributions or additional stock purchases, you can only claim $5,000 of loss for the year because of your basis limitation.  You now have a $2,000 loss carryover.
• In the third year, you contribute $5,000 and the K-1 reports a $10,000 income, your loss carryover is taken and your ending basis is $13,000.  Your K-1 income is reported as the $10,000 on your personal return and you recognize the carryover loss of $2,000 for net business income of $8,000.

@yoadrienne6

[yoadrienne6]

@AliciaP1 

You are AMAZING! These examples are SO helpful! Thank you, that's exactly what I needed; I get them.

One last question... please let me know if the following is correct?

1) So, this Form is really to help figure out how much you can reduce your business income by (i.e., if there were losses), which makes sense, since this is in the Income section of the Form...correct?

2) Conversely, it is not a mechanism to LOWER the amount of taxes owed because you had business losses... correct? (i.e., in your examples, if in Yr 3, there was 0 additional investment AND a -$12,000 business loss, then the debt carryover would be -$2k from Yr 2 and -$12K (current year 3's debt basis) for a total of -$14k carryover and a Stock Basis of $0 (but it's not like taxes are reduced by one's tax rate x $12K ). Do I have this right?

Sending you a virtual hug; thank you!

[yoadrienne6]

@AliciaP1 mmm... one last question: I'm trying to figure out the difference between "debt" basis (line 21) and "loan" balance. Is the following correct for your example above?

Loan Balance

Yr 1: $10K

Yr 2:  $10K

Yr 3: $15K

Debt Basis:
Yr 1: $0
Yr 2: -$7K

Yr 3: $0?

[AliciaP1]

Yes, the form is a mechanism to enable the IRS to ensure you are not reducing your current year's taxes with technically disallowed losses because of unreported basis limitations.  If you have a basis of $0 and you have carryover losses of $14,000, you take no loss in the current year and it is all carryover.  Now, if next year you have income of $10,000 you can take $10,000 of the carryover loss and report $0 income from the business and have $4,000 loss to carryover to the next year.

It's good to get a handle on this form now because I have a feeling it's not going away any time soon!

@yoadrienne6

[bles47]

I keep getting errors on my 7203 form when I review and go to file my taxes...our S-Corp had a net gain in Part I, but the only place to calculate allowable deductions (e.g.,  K-1 line 12 code A for charitable contributions) and have the math for the end of year stock basis work is to use lines in Part III. But the errors (cited for Part I lines 3a, 3b, 3c, 3g, 3h) all say "...cannot have a gain in Part I and a loss in Part III". Every line item matches info in my K-1:

• Line 3a (7203) matches Line 1 (K-1), which is a positive number
• Line 3b (7203) matches Line 2 (K-1), which in this case is 0
• Line 3c (7203) matches Line 3 (K-1), which in this case is 0
• Line 3g (7203) matches the additions of Lines 7,8a,8b, 8c (K-1), which in this case is 0 
• Line 3h (7203) matches Line 9 (K-1), which in this case is 0

Is there another way to NOT use Part III and have the math work? Should I just include the amount from Line 12, Code A from my K-1 in Line 13 (Other items that decrease stock basis)?

[AliciaP1]

Box 12 code A is supplemental information.  The reduction is already considered in your Box 1 income.  The only time you provide the breakout in Part III is if you have a loss to report because some of the items are treated differently for carryovers if needed.

For your situation, leave Part III blank.

@bles47

[bles47]

Thanks!! That makes sense given the instruction for the form, and yet when I look at my K-1 and the Shareholder Basis Worksheet our company accountant provided, the OBI does NOT include deductions against the stock basis (charitable contributions + nondeductible expenses) OR an 'other decrease' to the stock basis which was a transfer of shares to some of our other owners. My point here is that the only way to have Lines 1, 3a, and 15 in form 7203 match my K-1 is to have the 3 types of reductions in stock basis taken into account. Since Line 13 is the only one in the Turbo Tax version of the form that allows manual entry (Line 11 is calculated based on Part III) it seems the only option to make the math work. What am I missing?

[bles47]

P.S. I'd be happy to provide the actual line item math here if helpful (this is anonymous enough), but would need to know what is helpful to answer the question. Again, many thanks.

[AliciaP1]

If you have specific communication that the contributions are not already reported in your OBI, you can adjust the OBI number down on your basis calculation.  There is no function to tie the 7203 back exactly to your K-1 and the instructions to enter the amounts from your K-1 are a general guideline to get the info reported.  The instructions will be refined for next year I'm sure since I'm also sure this form is not going away any time soon!

@bles47