How many times have we inherited an S Corporation return with no basis information? S Corporations were not previously required to keep basis records to file tax returns, it was mostly a best practice amongst practitioners.
When basis limitation questions came up or suddenly clients were looking to sell their business and calculate capital gains you may have found yourself going back through years of K-1s to try to establish basis. Form 7203 is now required and essentially reports the basis to the IRS on shareholder returns.
Form 7203 is actually prepared and filed by shareholders, not the S Corporation itself. The IRS is looking to see documentation to support corporate losses more than anything else. S Corporation shareholders are limited in their ability to take passthrough losses if the shareholder’s basis in the corporation is also negative.
The IRS now essentially seeks to have these basis schedules included with shareholder returns. The only time that the form is NOT required is if NONE of the following circumstances apply:
- Your shareholder is NOT claiming a deduction for a loss from the corporation
- Your shareholder did NOT receive a non-dividend distribution
- The stock was NOT disposed of by the shareholder
- No loan repayments were received by the shareholder from the corporation
The presence of any of the above circumstances will result in the form being required with the shareholder return.
The following are action steps you can take now to help ensure that your team is prepared to complete these forms during tax season:
- 1. Review the number of S Corporation filings you have and how many of those shareholders you prepare individual tax returns for and then make a clear list of who may be impacted. This will help you as you assign out returns to ensure preparers know to look for the form with the returns they are working on.
- 2. Educate your team on why the form is required and how to fill out to cut down on review points during tax season.
- 3. If you don’t already have basis tracking workpapers for all your passthrough clients, consider working on those now so the schedules are ready before the busy season.
- 4. Inform your clients of the new requirements. It will take more time to prepare these forms and the time to consider a pricing increase to your engagements is now so your clients are not surprised when they receive their returns with an increased bill.