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Understanding Form 7203

Form 7203 was developed to replace the worksheet for figuring a shareholder’s stock and debt basis, formerly found in Form 1120-S. This form is required to be attached to 2021 Federal Income Tax Returns of S corporation shareholders who:

  • Are claiming a deduction for their share of an aggregate loss from an S corporation (including an aggregate loss not allowed last year because of basis limitations)
  • Received a non-dividend distribution from an S corporation
  • Disposed of stock in an S corporation (whether or not gain is recognized)
    OR
  • Received a loan repayment from an S corporation

Changes from previous years:

Debt Basis

Taxpayers must track and report every loan a shareholder makes to their S corporation. The form tracks whether the loan repayments show any reportable gain to the shareholder.

Distributions

Prior to Form 7203, when taxpayers’ distributions were in excess of the basis on the Schedule K-1 instructions, the capital gain was sometimes left off the Schedule D. Form 7203 calculates distributions in excess of basis and will automatically carry them to Schedule D, Capital Gains, and Losses, as a capital gain.

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