Starting with 2021 tax returns, Form 7203 replaces an unfiled worksheet for figuring a shareholder’s stock and debt basis. Form 7203’s purpose is to figure potential limitations on what an individual taxpayer may deduct on their tax return from their share of a S corporation’s deductions, credits, or other items. Form 7203 must be filed by a S corporation shareholder who:
- Claims a deduction for their share of an aggregate loss from an S corporation.
- Received a non-dividend distribution from an S corporation.
- Disposed of stock in an S corporation.
- Received a loan repayment from a S corporation.
There are potential limitations on losses a taxpayer may deduct from an S corporation, including:
- Basis limitation,
- At-risk limitations,
- The passive activity loss limitations, and
- The excess business loss limitations.
Form 7203 starts with a S corporations shareholder’s beginning stock basis and then tracks the various changes to the shareholder’s basis from capital contributions, capital distributions, and their share, in detail, of all types of income and loss listed on the Subchapter S tax return to arrive at the shareholder’s ending stock basis.
Form 7203 also tracks a shareholder’s loans to a Subchapter S corporation from the beginning to the end of the tax year.