Have your S corporation shareholders been asking for their tax basis information the past couple of years? If so, were you able to provide it for them?
A lot of S-corporation shareholders are asking because they have learned they needed to report this on their own return.
Unfortunately, in most situations neither the shareholder nor the S corporation have been tracking this. A new tax form is expected for 2021 that will bring even more questions from shareholders regarding tax basis.
Here is what S corporation leaders need to know:
New tax basis Form 7203
The IRS recently issued the official draft Form 7203, S Corporation Shareholder Stock and Debt Basis Limitations. The final form is expected to be available for filing with 2021 shareholder returns. The form is to be filed by S corporation shareholders if certain conditions exist. The draft 2021 Form 1120-S Schedule K-1 instructions released on November 18, 2021, include language directing the shareholder to this form.
Until now, there was no specified form to report the basis computation. Previously, the IRS did provide a worksheet in the Schedule K-1 instructions for calculating basis, but there was no required format or form.
Since 2018, the IRS has required shareholders of an S corporation to disclose a stock and debt basis computation with their return if the shareholder does any of the following:
- Claims a deduction for their share of an aggregate loss
- Receives a distribution
- Disposes of stock
- Receives a loan repayment from an S corporation
The draft Form 7203 instructions also includes a tip that reads, “It may be beneficial for shareholders to complete and retain Form 7203 even for years it is not required to be filed, as this will ensure their bases are consistently maintained year after year.”
Who is responsible for maintaining tax basis?
The requirement to maintain tax basis (and to disclose tax basis on Form 1040) is ultimately the responsibility of the S corporation shareholder. There is no requirement for the bank to maintain tax basis schedules for its shareholders or to include this information with the Schedule K-1s.
This comes as a surprise to many shareholders and the practitioners who are completing the shareholder returns. The calculations to properly calculate the shareholders basis can be complicated and may require large amounts of historical data to prepare complete and accurate calculations.
There are a number of benefits of maintaining S corporation tax basis at the S corporation level, including accuracy, cost, a more formalized due diligence process and tax deductibility of related fees.
Partnerships have recently been required to track tax basis for their partners, and it’s a common expectation among practitioners that this will eventually also be required to be tracked by S corporations for their shareholders. For now, there is no requirement to do this, but it is worth considering for your bank and your shareholders.
How Wipfli can help
Our team specializes can help cut through the complexities of tax basis schedules for you and your shareholders. To learn more, see our tax services for financial institutions web page or check out these additional articles:
New tax basis schedules requirements for S-corporations
More states enact SALT workarounds for S-corporation banks