New S Corporation Basis Reporting Rules
A recently published “clarification” by the Internal Revenue Service (IRS) related to reporting S Corporation activity on Schedule E of the Form 1040 has caused some confusion and concern among taxpayers and tax return preparers.
The Internal Revenue Code section 1366(d)(1) provides that S Corporation shareholder’s losses and deductions cannot exceed their basis in stock and debt. And Treasury Regulation section 1.6001-1(a) requires shareholders to maintain permanent books and records to establish losses and deductions reported on their return (basis computation). This has been the law for a long time- shareholders (not the corporation) are required to track the basis in their S Corporation stock and make sure they have sufficient basis to takes losses or distributions tax-free when they report these items on their personal return on Schedule E.
So what is “new” in the IRS clarification? What is new is two-fold:
- There is a new checkbox on Schedule E where you, as the owner of S Corporation stock, must check the box if a “basis computation is required” and
- The basis calculation must be attached to your personal tax return (if required).
This is a departure from the traditional rule in that the IRS always required S Corporation owners to be able to provide, upon request, proof of necessary basis in their stock to take losses or prove distributions were not in excess of their basis (and therefore taxable). Now, they are not waiting and want S Corporation shareholders to provide their proof of adequate basis in advance of any request.
In the published clarification the IRS states they want a basis schedule attached when the owner of an S Corporation reports a loss, receives a distribution, disposes of stock or receives a loan repayment from the S Corporation.
Some S Corporation shareholders think this is a new rule but it is only new to the extent that the IRS wants the basis schedule attached to the Schedule E in advance of any request by the IRS.
It would be to the benefit of all S Corporation shareholders to make sure they have an up to date basis schedule in case they meet the new requirements for attaching that schedule to their personal tax return.
Please see our previous article on the basics of calculating S Corporation basis. However, the rules on tracking basis can be complicated, and if you have any questions on how to accurately track basis, you should consult your tax advisor.