This article will help you generate shareholder basis statements that you can provide to shareholders with their Schedule K-1. For information about completing Form 7203, which is produced and filed with the individual 1040, see here.
Starting in tax year 2022, the program will no longer generate basis schedules. Mid-season of tax year 2021, Form 7203 was introduced, replacing the program's produced shareholder basis schedule. You can still force Form 7203 to print for any shareholder on the Sch K Misc screen.
Entering basis information for a shareholder in an S Corporation return:
- Go to Screen 9, Shareholder's Basis.
- Select on the Shareholder from the left navigation panel.
- Complete all applicable Basis information in this screen.
- Note: Stock Basis at beginning of tax year, Prior year loss in excess of basis, Principal amount of debt owed to shareholder at beginning of tax year, and Debt basis at beginning of tax year, if different will proforma (transfer) from the prior year if applicable.
- Repeat for each Shareholder.
Other entries that will affect shareholder basis are Loan repayments and Distributions in Screen 8, Distributions, Loan Repayments.
The basis of a shareholder's stock is adjusted in the following manner and in the order listed (From IRC Section 1367 Adjustments to basis of stock of shareholders, etc.)
Basis is increased by:
- All income (including tax-exempt income) reported on the K-1
- The excess of the deduction for depletion (other than oil and gas) over the basis of the property subject to depletion.
Note: You must report the taxable income on your personal return (if you are required to file a return) for it to increase your basis.
Basis is decreased by:
- Property distributions (including cash) made by the corporation (excluding dividend distributions reported on Form 1099 DIV and distributions in excess of basis) reported on K-1, line 20.
- Nondeductible expenses
- Depletion deduction for any oil and gas property held by the corporation, but only to the extent your pro-rata share of the property's adjusted basis exceeds that deduction
- All deductible losses and deductions reported on Schedule K-1Note: (b) or (c) may come before (d) if an election is made to that effect.
Basis is calculated at the shareholder level. The Schedule K-1 does not consider any shareholder basis limitations. Lacerte prints the Shareholder Basis Schedule for the preparer's and shareholder's convenience in tracking the stock basis from year to year. Losses passed through to the shareholders are first applied against Stock Basis, reducing it to zero, then the remaining loss is used to reduce Debt Basis (but not below zero). Any future increases, for example a profit during the tax year, are first used to restore the Debt Basis, then the Stock Basis.
If a shareholder's debt basis has been reduced and has not been fully restored, the shareholder will have ordinary income/capital gain to report when the S Corporation makes the loan repayment.
To calculate the loan repayment amount that must be reported as ordinary income/capital gain:
- Figure the Debt Basis before the payment.
- Divide the adjusted basis (including any adjustments to restore debt basis) in the loan by the outstanding loan balance.
- Multiply the payment by the percentage calculated in step 2.
- Take the difference between the payment amount and the amount from step 3. Report this amount as ordinary income/capital gain.