Preparing Form 7203: Calculating S Corporation Shareholders' Stock and Debt Basis

The requirement for shareholders to include a basis schedule with their returns has been in place since 2018 and has now been formalized with the requirement to file new Form 7203, S Corporation Shareholder Stock and Debt Basis Limitations. While the instructions state the requirement to file this new form only applies in four specific situations, one of these is the receipt by a shareholder of non-dividend distributions. Where a shareholder does not meet any of the filing criteria, it is to the shareholder's advantage to track basis and memorialize the calculation on an annual basis to avoid the arduous process of reconstructing basis in the future.

The form is divided into three sections: Part I Shareholder Stock Basis, Part II Shareholder Debt Basis, and Part III Shareholder Allowable Loss and Deduction Items. Tax practitioners must properly determine whether a debt is in the form of an open note or formal note and what stock blocks the shareholder holds. Although these determinations may appear simple, they can significantly affect the tax paid by the shareholder. Whether a gain is treated as ordinary or capital, how prior period losses are netted in the current year, and the amount of a note and whether it is written all influence the amount of tax paid by a shareholder. Pass-through entity tax advisers need to thoroughly understand how to report shareholders' basis, the pertinent regulations governing these calculations, and potential conflicts between the form instructions and these regulations.

Listen as our panel of S corporation experts walks you through the preparation of Form 7203, Parts I-III to calculate an S corporation shareholder's stock and debt basis, emphasizing lessening the overall tax burden of the shareholder.

1. Form 7203: background
2. Filing requirements
3. Preparing the form
   • Part I – Stock Basis
   • Part II – Debt Basis
   • Part III - Shareholder Allowable Loss and Deduction Items
4. Calculations and examples
   • Loan repayments
   • Utilizing prior years' suspended losses
   • Other examples
5. Reconstructing basis
6. Best practices

The panel will cover these and other critical issues:

• When are loan repayments treated as ordinary vs. capital income?
• Potential differences between the IRS' Form 7203 instructions and the Code
• How to report the utilization of prior year losses on Form 7203
• Using stock blocks to minimize shareholders' tax
• Differences between formal and open notes

Learning Objectives

After completing this course, you will be able to:

• Identify differences between formal and open notes
• Determine when a loan repayment could be treated as capital gain rather than ordinary
• Decide best practices for reconstructing prior years' basis
• Ascertain when shareholders are required to complete and include Form 7203 with their returns

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience preparing complex tax forms and schedules, supervising other preparers or accountants. Specific knowledge and understanding of pass-through taxation, including taxation of partnerships, S corporations and their respective partners and shareholders.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).