The following informational diagnostic is generating for a passthrough S corporation:
S-Corporation #: A negative stock basis was computed of [shows dollar amount] (see the note on Form 7203, line 6). Per Internal Revenue Code Section 1368(b)(2), if the S-Corporation has no earnings and profits from when it was a C-Corporation, then the distributions that caused the negative basis amount is taxable as a capital gain. The program does not automatically compute this gain. Any gain required to be recognized must be entered into the disposition screen. Don't increase the stock basis for the amount of capital gain reported for the excess, since the program already limited the basis to zero. (ref. #6584)
Follow these steps to resolve this diagnostic:
- Go to Input Return ⮕ Income ⮕ Dispositions ⮕ (Schedule D, 4797, etc.)
- Select Details on the asset to expand the entries.
- Enter the Description of property.
- Enter a negative date in Date acquired (negative date=various).
- Enter a negative date in Date sold (negative date=various).
- Enter the excess of basis in Sales price.
- Select the Less Common Scenarios tab.
- Scroll down to the Corresponding Activity Information - Passive (8582) / At-Risk (6198) / Investment Tax (8960) / Qualified Business Income (QBI) section.
- Select Schedule E (S corporation) from the Form number of related activity dropdown menu.
- Select the applicable Activity name or number.
- Check the box 'Include in at-risk/basis limitation'.
- Completing the above steps will include the gain on the Schedule D and the basis limitation schedule.
- These steps should also resolve diagnostic (ref. #6584), as long as the correct amount of gain has been entered.
- The diagnostic mentions to enter the gain under S Corporation Information under the Basis Limitation section in the Other current year increases to basis field. However, by checking the box above, this action doesn't need to be completed.
- If you'd prefer to enter the gain manually, don't check the box above and instead enter the amount of excess using the instructions from the diagnostic.