The IRS has released the official draft of the proposed Form 7203, S Corporation Shareholder Stock and Debt Basis Limitations, [1] to be used to report S corporation stock basis, debt basis, and allowed/disallowed losses on Forms 1040. The form is virtually identical to the one we discussed in July of 2021 when the IRS published information about the form in the Federal Register.[2]

When the Form Must Be Filed with Form 1040

The parts of the form are virtually identical to the worksheets previously provided by the IRS in the Schedule K-1 instructions. Although the draft instructions were not released with the draft forms, the draft instructions for Schedule E, which have been issued, provide that the form will need to be attached in the following circumstances:

If you are claiming a deduction for your share of an aggregate loss (or you receive a distribution, dispose of stock, or receive a loan repayment from an S corporation), check the box on the appropriate line in Part II, column (e), and attach Form 7203 to your return.[3]

Shareholder’s Basis in Stock

Part I details the computation of the stock basis of the shareholder.

Basis in Debt Owed to the Shareholder by the Corporation

Part II handles the calculation of debt basis, with Part A providing information on the amount of each debt owed to the shareholder and whether the debt is a formal note or an open account debt.

Part B computes the actual debt basis as well as any gain that would be reportable due to repayments of the various debts.

Allowable Losses and Carryover Amounts

Finally, Part III calculates the allowable loss and the amounts of any carryovers to the following year:

[1] Draft Form 7203, S Corporation Shareholder Stock and Debt Basis Limitations, Draft as of October 21, 2021, https://www.irs.gov/pub/irs-dft/f7203--dft.pdf (retrieved October 23, 2021)

[2] Edward K. Zollars, CPA, “IRS Proposes New Form 7203 for S Corporation Shareholders to Report Basis Computations with Form 1040,” Current Federal Tax Developments website, July 21, 2021, https://www.currentfederaltaxdevelopments.com/blog/2021/7/19/irs-proposes-new-form-7203-for-s-corporation-shareholders-to-report-basis-computations-with-form-1040 (retrieved October 23, 2021)

[3] Draft of 2021 Instructions for Schedule E, Draft as of September 28, 2021, p. 10, https://www.irs.gov/pub/irs-dft/i1040se--dft.pdf (retrieved October 23, 2021)