Keeping Up With Basis

This week’s writing needs to come with a disclaimer. I like to write in a more conversational manner here but that may not be possible today, for it is difficult to discuss shareholder basis and a new tax form for it that is showing up this year for S Corporations in a light and breezy manner. So to that end, if you know that does not apply to you, come back next week.

At its most, well, base level, basis is the amount a shareholder has invested in an S Corporation. This is important because it determines whether distributions are taxable and whether losses can be deducted on a personal tax return. The new tax form that will deal with this is Form 7203. The form itself can viewed in a draft form here and a draft of instructions for the form can be visited here. If this is something your business has been tracking all along, filling this form out may take some time, but is not overly complicated. If you have not, though, be thankful it is early in the year and you can start to get your books and recordkeeping in order to complete the task.

So you need to be sure that your bookkeeping is properly tracking this – making sure that any money contributed to the business from, and distributions to, individual shareholders are being recorded.

This form is going to be necessary if you are claiming a deduction for your share of a loss in an S corporation. The IRS wants to see that it is really your money that paid the expenses of the business that resulted in that loss.  After all, you should not get to claim a deduction for expenses that you did not help pay for.

Call it coincidence or not, but this increased reporting is coming at a time when many businesses may be reporting a loss. There are few businesses that have not been affected by the COVID-19 pandemic and many industries were so affected that they saw some big losses. At the same time, however, there was a lot of money available from many different programs whose purpose was to help businesses weather those difficult times. This means there are businesses that will not be showing a profit, but at the same time, their shareholders did not see what they had invested in the business evaporate. Rather, those businesses were paying expenses with money that came from elsewhere. And in that situation, its shareholders should not then get to deduct losses on their personal returns.

So as promised, that is a bit more explanation and actual accounting talk than we usually put here. But as something new, it deserved the space and hopefully will help some of you out there be more prepared for handling the new requirements. 

Warmly,

Josh Bousquet
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