Reminder – S corporation shareholder basis reporting requirements must not go overlooked

by | Jun 8, 2022

TAX ALERT | June 08, 2022

There is a new reporting requirement for 2021 personal income tax returns due in 2022 for certain S Corporation Shareholder that will require these shareholders and their tax advisors to analyze and track their S corporation stock and debt basis if they have not already done so. Generally, this analysis and the completion of new Form 7203, S Corporation Shareholder Stock and Debt Basis Limitations, for impacted taxpayers will be required by Oct. 15, 2022, so time is of the essence.

As a result of the shareholder basis reporting requirements implemented in 2018 by the IRS, many taxpayers are or will be required to disclose shareholder basis information. Prior to 2021 there was no formalized disclosure method, however, for 2021 this disclosure is now required to be made via Form 7203. This also highlights a trend by the IRS in increased disclosure requirements, which may indicate that there are potentially more requirements coming – or that a broader number of shareholders might begin to be subject to the current reporting requirements. 

Why is S Corporation stock basis important?

Knowing and tracking S corporation shareholders’ stock and debt basis is a critical part of S corporation stock ownership and a key component in a number of important events. Calculating gain or loss upon disposal of the S corporation stock, determining the extent to which a shareholder can utilize S corporation losses, determining whether an S corporation distribution is taxable to the shareholders, and understanding whether any portion of a shareholder loan repayment might trigger gain all require thorough and accurate knowledge of the shareholders’ basis in their S corporation shares.

Moreover, a shareholder’s basis plays a large role in certain tax planning endeavors of critical importance to S corporation shareholders – for example, planning for and understanding the tax consequences of certain mergers or sale transactions, determining whether basis differences among blocks of stock acquired at different times might create planning opportunities or evaluating which shares to transfer as gift when contemplating estate planning all require knowledge of the shareholder’s basis.

When is Form 7203 required?

S corporation shareholders must include Form 7203 (instructions can be found here) with their 2021 tax filing when the shareholder:

1. Claims a deduction for their share of an aggregate loss from the S corporation (including an aggregate loss not allowed in a prior year due to a basis limitation); 

2. Receives a non-dividend distribution;

3. Disposes of stock in the S corporation, regardless of whether gain is recognized (gifting stock would therefore trigger the requirement); or

4. Receives loan repayments from the S corporation.

Who is responsible for filing Form 7203?

Many S corporations provide their shareholders with annual basis information along with their Schedules K-1. However, the responsibility for the accuracy and filing of Form 7203 falls with the shareholder, not the S corporation.

Does Form 7203 require block by block basis reporting?

While block by block basis reporting can be beneficial for shareholders to maintain – and shareholders should be ready to provide this information in the event of an audit – block by block basis reporting is not required to be disclosed on the new Form 7203.

What were S Corporation Stock Basis reporting requirements prior to 2021?

Beginning in 2018, the IRS changed the landscape in this area by expanding the requirement for S corporation shareholders to disclose their basis upon the occurrence of certain events. The IRS included a sample 3-part stock and debt basis worksheet to help with this disclosure, and shareholders were required to disclose under the same circumstances as those under new Form 7203

What should S Corporation Shareholders do today?

All shareholders that fall under the Form 7203 reporting requirements should calculate (if they have not already) and review their basis information such that they are ready to report the information on Form 7203 with their 2021 income tax return.

In some cases, shareholder basis may have been calculated in the past, but may have only been afforded a cursory review. For those required to disclose (and indeed even those that are not, but who might, at some point in the coming years, be required to do so – via meeting one of the current requirements, or the possible expansion of those requirements by the IRS at some time in the future), this review will likely require additional time and expense to complete.

Should I do anything if a Form 7203 is not required for 2021?

The progression of the S corporation basis disclosure requirements seems to indicate a trend by the IRS towards disclosure for all S corporation shareholders. Accordingly, shareholders who might not meet the requirements for basis disclosure under Form 7203 should nevertheless maintain and track their stock and debt basis – those who have not maintained this information over the years should seriously consider spending the resources to compute this information sooner rather than later.

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This article was written by Andy Swanson, Kyle Brown and originally appeared on 2022-06-08.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/tax-alerts/2022/reminder-s-corporations-shareholder-basis-reporting-requirements-must-not-go-overlooked.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

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