Form 7203, S Corporation Shareholder Stock and Debt Basis Limitations, can be a tricky and tedious form to understand and prepare. It’s important to know how to compute the shareholder’s basis in their S corporation and track it so it can be used for such things as claiming losses, calculating deduction limitations and determining what can be carried forward.
Below, you’ll find a few of the top questions from a recent webinar on the topic and their accompanying answers. If you choose to attend the on-demand version of this webinar, you’ll have access to the full recording and the entire list of Q&As.
Q: Is the Reg. §1.1367-1(g) election made on the Form 1120-S for each shareholder or on the shareholder’s Form 1040?
A: It’s made on the shareholder’s Form 1040. The S corporation shareholder makes the election on a timely filed original or amended return by attaching a statement to the return.
Q: How does a shareholder receive debt basis?
A: Debt basis is received from a debt that is owed by the corporation directly to the shareholder.
Q: Does a personal guarantee create debt basis?
A: No. A shareholder’s guarantee of a loan made to the S corporation by a bank (third party) does not create debt basis.
Q: If an S corporation shareholder has a positive basis, then “draws” are not taxable on personal returns correct?
A: It depends. Distributions to a shareholder are not taxable if they have stock basis. Distributions will reduce stock basis, but they do not reduce debt basis. Distributions in excess of stock basis are taxable.
To learn more about the tax implications of S corporation shareholder basis, you can watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to learn more, join our completely free 30-day trial at natptax.com/explore.
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Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing.