Form 7203 is used to figure limitations on the taxpayer's share of S Corporations deductions, credits, etc. that can be claimed on the tax return.
Why would my deduction be limited?
Generally, the amount of deductions you are able to claim is limited to the basis in your stock and any loans you make to the corporation. Any losses or deductions that are not allowed in the current year (because of the basis limit), can be carried forward indefinitely and deducted in a later year (based on the basis limitation for that year).
How is my basis adjusted?
According to the IRS, the basis of your stock (cost) is adjusted annually as follows in the order listed (exceptions apply):
- Basis is increased by (a) all income (including tax-exempt income) reported on Schedule K-1 (Form
1120-S), and (b) the excess of the deduction for depletion (other than oil and gas depletion) over the basis of the property subject to depletion. You must report on your return (if you are required to file one) any amount required to be included in gross income for it to increase your basis.
- Basis is decreased (but not below zero) by (a) property distributions (including cash) made by the corporation reported on Schedule K-1 (Form 1120-S), box 16, code D, minus (b) the amount of such
distributions in excess of the basis in your stock.
- Basis is decreased (but not below zero) by (a) nondeductible expenses, and (b) the depletion deduction for any oil and gas property held by the corporation, but only to the extent your share of the property's adjusted basis exceeds that deduction.
- Basis is decreased (but not below zero) by all losses and deductions reported on Schedule K-1
Who needs to file form 7203?
S Corporation shareholders who:
- Wish to claim a deduction for their share of an aggregate loss from an S corporation (including an aggregate loss not allowed last year because of basis limitations),
- Received a non-dividend distribution from an S corporation,
- Disposed of stock in an S corporation (whether or not gain is recognized), or
- Received a loan repayment from an S corporation.
Where do I enter this in the program?
- Federal Section
- Less Common Income
- K-1 Earnings
- Attach Form 7203?
- Choose Yes