On the surface, the concept of basis is relatively simple. Basis is increased by income items, then decreased by distributions, and finally decreased by deduction and loss items. Order is important and basis can never be negative. Losses and deductions that are disallowed by basis limitations can be carried forward indefinitely and deducted in a later year, subject to the basis limit for that year.

Most practitioners, if asked, would agree that for profitable S corporations making small shareholder distributions, the concept of basis doesn’t enter into many client conversations. Only when an event occurs – a sale for example – does the concept of basis become important.

Basis schedules should be maintained from day one. If that didn’t happen, and if the client has copies of all the Schedule K-1s (Form 1120-S), stock basis schedules can be recreated. In reality, most clients do not have access to prior year K-1s, and the process of recreating basis schedules may be difficult, if not impossible.

If the idea of calculating shareholder basis makes you sick, now is your chance to speak. The IRS has made a request for basis comments on a new proposed form.

The IRS is requesting comments on Form 7203, S Corporation Shareholder Stock and Debt Basis Limitations. Form 7203 is a new proposed form that shareholders will use to calculate their stock and debt basis. As we know, correct basis enables shareholders to properly claim losses and deductions. The proposed form would replace the Schedule K-1 instruction basis worksheets and the manual basis computation papers practitioners attach to a shareholder’s income tax return.

Many practitioners are aware of the note on Page 2, Part II of Schedule E (Form 1040). The note states “if you report a loss, receive a distribution, dispose of stock, or receive a loan repayment from an S corporation, you must check the box in Column (e) on Line 28 and attach the required basis computation.” The new Form 7203 would be filed with the tax return whenever the taxpayer is required to attach basis computations. The affected public includes individuals, tax exempt entities, and estates and trusts.

We reached out to the IRS to see if we could obtain a copy of the proposed Form 7203 and were told that they were not able to share the form at this time, as it is still being drafted and then were instructed to limit comments to the abstract description within the Federal Register notice.

If someone has an interest in commenting on Form 7203, written comments need to be received on or before Sept. 17, 2021. Additional information can be found on the Federal Register.

If you have an interest in learning more about S corporations and basis, check out NATP’s Intermediate S Corporations self-study or Preparing S Corporation Returns self-study.