S Corporations may take you a little longer this tax season. Form 7203 is now required for shareholders of S Corps. It is important to note that the shareholder, not the S Corp, is responsible for filing the form, and it may do you well to set best practices in your firm to form required no matter what.
S Corporation shareholders must file form 7203 if any of the following apply:
- Shareholder(s) are claiming operational losses (including carryover)
- A non-dividend distribution was received
- Sale of stock occurred
- S Corporation was repaid for any amount of loans to shareholders
The form must be prepared for every individual shareholder, even if the shares of the S Corp are held 100% by spouses. Each spouse must file their own form. The purpose of the form is to track shareholder basis and essentially limit losses and excess distributions appropriately. Shareholders have always been required to track their own stock basis, but as it turns out, they’re not very good at it.
It is a good practice to be tracking these details for both your S Corp and Partnership tax clients either way. The information comes in handy not just for preparing these forms but when sales all of a sudden occur or other unexpected transactions, it can interrupt your workflow if you have to go back and recalculate 15 years’ worth of basis.
It is highly recommended that your team starts working on these workpapers now to save time during tax season when it’s in full swing. Tracking is also critical because it’s unclear which tax softwares will appropriately call this form out as required. Software won’t help you either if historical information in the software isn’t accurate.
Both you and your shareholders need to be careful with loan balances as well. The IRS has not been blind to S Corp owners wanting to write debt onto their own balance sheets as a way to avoid loss limitations or tax on excess distributions. Notes need to be formally memorialized by signed paperwork and need to be tracked accordingly.
As with anything related to the IRS, the instructions on new form 7203 are not short. Leaving yourself extra time this season is going to be critical. Not to mention you will likely find yourself writing review points on these forms until everyone gets used to the requirements.
Consider hosting team training in the coming weeks to help give your staff a boost and forewarn your clients that fees may be impacted by the extra work.
