Articles · Advanced · S Corporations and Form 1120-S
S Corporation Shareholder Basis and Form 7203
A shareholder's basis decides whether losses are deductible and whether distributions are tax-free. Form 7203 reports the calculation with the shareholder's return when required.
Ordering rules
Stock basis is adjusted each year in a set order under Section 1367 and the regulations. Increases for income come first, then decreases for distributions, then nondeductible expenses, and finally losses and deductions.
Because distributions come before losses, a shareholder can receive a tax-free distribution while a loss is suspended for lack of basis.
Debt basis
Losses beyond stock basis can use debt basis, but only for bona fide loans made directly by the shareholder to the corporation. Guaranteeing a bank loan does not create debt basis. Later income restores debt basis before stock basis.
Repaying a loan with reduced basis can create taxable income, so it should be reviewed carefully.
Form 7203
Shareholders generally attach Form 7203 if they claim a loss, receive a distribution, dispose of stock, or receive a loan repayment. Because the company often does not know a shareholder's basis, the calculation is the shareholder's responsibility.
Distributions above stock basis are generally treated as capital gain. Basis schedules should be built from the start, or reconstructed from earlier returns.
Key takeaways
- Distributions reduce basis before losses do.
- Guarantees do not create debt basis.
- Shareholders need their own running basis schedule.
For general education only, not tax advice. Tax law changes often, so confirm current rules and amounts with primary sources.