Form 7203 is used to figure limitations of your share of the S corporation's deductions, credits, and other items that can be deducted on your return.
After completing your K-1 Form 1120-S, you may be asked if you wish to complete From 7203. If so, use this guide to assist you in making your entries.
Stock Information (Lines C- D)
Stock Block- Line C
"When a shareholder has a different basis in different blocks of stock, pass-through items are generally allocated pro rata to all shares, regardless of their different bases. If there is a partial stock sale or partial redemption, you may file more than one Form 7203 and provide a description of what period the form covers." IRS Form 7203 instructions.
How was the stock acquired? - Line D
Check the applicable box(es) to indicate how the stock was acquired. If you didn't acquire the stock through purchase, inheritance, gift, or as an original shareholder, check “Other” and enter the method by which you acquired your stock.
Part I- Shareholder Stock Basis
Stock basis at the beginning of the corporation's tax year - Line 1
- If this is your first year as a shareholder, enter the amount of your initial contribution to the S corporation (whether cash or property).
- If you have been a shareholder for multiple years, enter the stock basis at the beginning of the current year, which will be the ending stock basis from the prior year.
Basis from capital contributions or stock acquired - Line 2
Report any capital contributions you made to the S corporation during the year, as well as the basis from stock acquired. This includes:
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Cash Contributions
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Property Contributions
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Stock Acquired
Recapture of business credits - Line 3L
If the S corporation has claimed business credits that are subject to recapture, you would report the amount of recaptured credits here.
Example: Investment Credit Recapture: If the S corporation claimed an investment credit related to property that was later sold or disposed of, a recapture may be required.
Other items that increase stock basis- Line 3M
This line is used for items not specifically covered elsewhere on the form but that still increase the stock basis.
Example: If you, as a shareholder, contributed additional money or property to the S corporation, that would increase your stock basis.
Depletion for oil and gas - Line 8b
Enter the oil and gas depletion claimed on your personal return up to your proportionate share of basis in the property subject to depletion. Don’t enter an amount for depletion not related to oil and gas property.
Business credits (sections 50(c)(1) and (5)) Line 8c
This line is used to report business credits associated with Section 50(c)(1) (Energy Investment Tax Credit) and Section 50(c)(5) (Recapture of certain investment tax credits) of the Internal Revenue Code, which are related to investment credits for certain businesses. The amount of these credits passed through to you as a shareholder will be reported on Schedule K-1 (Form 1120S), and you are required to report it on Line 8c of Form 7203.
Other Items that decrease stock basis - Line 13
This line is specifically for items that reduce your stock basis. These can include:
- Distributions from the S Corporation
- Losses and Deductions Allocated to You
- Non-Deductible Expenses
- Section 179 Deductions
- Other Decreases
Amount to adjust calculated other income - Line 15
Part II- Shareholder Debt Basis
You must complete this section if you have personally loaned money to the corporation. Please enter each loan separately.
Section A - Amount of Debt
Debt Description
Enter description of debt for the taxpayer's use only
- Formal note - The term "formal note" refers to a written, legal agreement that documents a loan made to the S corporation by its shareholder. The loan must be documented with a formal, binding note, which outlines the terms and conditions of the loan, such as the interest rate, repayment schedule, and maturity date.
- Open Account - The term "open account" refers to a loan arrangement between the shareholder and the S corporation where the shareholder has made an informal loan to the corporation.
Loan balance at the beginning of the corporation's tax year - Line 16
Enter the loan balance at the beginning of the S corporation's tax year for any loans you, as the shareholder, have made to the S corporation.
Additional loans - Line 17
Enter the loan balance at the end of the corporation’s tax year for any loans you, as the shareholder, have made to the S corporation.
Principal portion of debt repayment - Line 19
Enter the amount of the loan the corporation repaid.
Section B- Adjustments to Debt Basis
Debt basis at beginning of the corporation's tax year * - Line 21
Report the debt basis you had at the beginning of the S corporation's tax year. This figure reflects how much of your debt basis was available at the start of the tax year, based on loans you made to the S corporation.
Example: You loaned $30,000 to the S corporation in January of the current year. This amount of $30,000 would be entered on Line 21 as the debt basis at the start of the year
Part III - Shareholder Allowable Loss and Deduction Items
Losses and other deduction items are limited to the sum of your stock and debt basis. When there is insufficient stock and debt basis, and more than one type of loss or deduction item reducing basis, the amounts allowed as a loss or deduction are allocated on a pro rata basis.
Program entry:
- Description of income/loss items
- Carryover amount from previous year - Enter the amount for Carryover amount from previous year (carries to Column B)
- Current year losses and deductions -carries to Column A; automatically pulled from program entries
- Adjust current year losses and deduction - Enter the amount you wish to adjust for the current year losses and deductions carries to Column A