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IRS Form 7203

IRS Form 7203
Ines Zemelman, EA
29 July 2022

Are you curious about IRS Form 7203? This form is used by S corporation shareholders to figure out the potential limitations of their share of the S corporation’s deductions, credits, and other items that can be deducted on their returns. In this post, we'll provide an overview of Form 7203 and discuss some important points related to it. So, if you're ready to learn more about this form, keep reading!

What’s New with IRS Form 7203?

The Internal Revenue Service (IRS) has released the final form of Form 7203 to better establish S corporation stock basis in conjunction with income tax returns submitted by S corporation owners, which can include individuals, some tax-exempt entities, and certain estates.

Form 7203 and its independent instructions are designed to replace the three-part Worksheet for Figuring a Shareholder's Stock and Debt Basis and its related instructions that were formerly included in the Shareholder's Instructions for Schedule K-1 (Form 1120-S).

While the S corporation's basis calculations remain intact, the new form demands additional information to substantiate and justify the basis computations. As the form deals with S company stock and debt basis, some observers are under the impression that it is filed with the 1120S business return. Nonetheless, the form will be included in a shareholder's income tax return if any of the following are true of the S corporation:

  • The shareholder sells his/her shares of stock during the tax year.

  • The shareholder receives a payout from the S corporation.

  • The shareholder receives a loan payback from the S corporation during the tax year.

  • The shareholder claims a loss-related deduction.

In addition, the IRS recommends that you complete and save this form even in years where none of the above apply.

Who Files Form 7203

Form 7203 is submitted by shareholders of S corporations who:

  • Seek a deduction for their proportionate share of an overall loss incurred by an S corporation (including an aggregate loss not allowed last year because of basis limitations)

  • Received a non-dividend payment from an S corporation and sold S corporation stock (whether the gain is recognized)

  • Loan repayment from an S corporation was received.

When Is Form 7203 Required?

Form 7203 is required when a shareholder of an S corporation sells shares, receives a payout, or receives a loan repayment from the company. Additionally, the IRS recommends you complete and save this form in years where none of the above apply, to better establish an S corporation stock basis.

What Are the Basis Limitations of S Corp Form 7203?

There may be restrictions on the amount of corporate losses you can write off on your tax return. The following restrictions must be adhered to: the basis limitations, the at-risk limitations (Form 6198), the passive activity loss limitations (Form 8582), and the excess business loss limitations (Form 461).

In general, the basis of your shares and any loans you made to the corporation are the only things that can be deducted from your share of the total losses and deductions listed on Schedule K-1 (Form 1120-S). Your stock's basis is typically calculated at the conclusion of the corporation's tax year. Any losses and deductions that weren't permitted this year due to the basis limit can be carried forward continuously and considered when determining the basis limit for a subsequent year.

You oversee maintaining the data required to calculate the basis of your equity in the corporation. After each corporate tax year, information is provided on Schedule K-1 (Form 1120-S) to assist you in calculating your stock basis. The following adjustments are made to your stock's basis each year, or generally its cost, in the order indicated, barring any special circumstances. Additionally, other Internal Revenue Code provisions may allow for the adjustment of the basis. In general, you should use this form to calculate your total stock and debt basis.

  1. The excess of the depletion deduction (other than for oil and gas depletion) over the basis of the property subject to depletion is added to the basis along with all income (including tax-exempt income) reported on Schedule K-1 (Form 1120-S).

  2. The basis is reduced (but not below zero) by any property distributions (including cash) made by the corporation and reported on Schedule K-1 (Form 1120-S), box 16, code D, less any distributions that exceed your stock's basis.

  3. The depletion deduction for any oil and gas property owned by the corporation, but only to the extent that your portion of the property's adjusted basis exceeds that deduction, reduces the basis (but not below zero).

  4. All losses and deductions recorded on Schedule K-1 (Form 1120-S) reduce basis (but not below zero).

Any amount specified under (3) that is greater than the basis of your stock plus any debt owed to you by the corporation is regarded as an amount described under (3) for the subsequent tax year if you make this choice.

A declaration stating your agreement to the carryover rule of Regulations section 1.1367-1 and the name of the S corporation to which the rule applies must be included in your timely filed original or amended return to make the election. If the IRS doesn't agree to let you cancel your election, it becomes effective for the current tax year and all upcoming ones for that S corporation.

Based on its pro rata portion of the modifications, the basis of each share of stock is either increased or decreased (but not below zero). The excess reduces (but does not go below zero) the remaining bases of all other shares of stock in proportion to the remaining basis of each of those shares if the total basis decreases due to a share exceeds the basis of that share.

Conclusion

IRS Form 7203 is a tax form used to report the basis of your shares in an S corporation. This form helps you calculate the adjusted basis of your stock and debt in the corporation. There are various restrictions on how much corporate losses you can write off on your tax return, and this form assists you in remaining compliant with those regulations.

If you have any questions about IRS Form 7203 or how to file it, please consult a tax professional. Filing this form correctly is crucial to maintaining the status of your corporation and avoiding penalties from the IRS.

Ines Zemelman, EA
Founder of TFX