After the passing of the Tax Cuts and Jobs Act, IRS released the revised Form 1040 – US Individual Income Tax Return earlier this year. As part of the revision, a new checkbox has now appeared on Schedule E of Form 1040 that applies to S Corporation Shareholders. IRS posted information about this change on its website stating:
As stated in Part II of the Schedule E (Form 1040), a taxpayer who owns an interest in an S corporation and reports a loss, receives a distribution, disposes of stock, or receives a loan repayment from the S corporation must check a corresponding box under line 28, column (e), and attach a computation detailing their S corporation basis. The discussion about basis rules for S corporations in the Instructions for Schedule E (Form 1040) for Parts II and III does not limit or modify this requirement.
Per the instructions, an individual taxpayer who owns an interest in an S Corporation must attach a copy of their stock basis calculation to their return if the individual:
- reports a loss
- receives a distribution
- disposes of stock
- received a loan repayment from the S Corporation
The requirement to attach a basis schedule to Form 1040 for an S Corporation shareholder claiming a loss is not new. However, the instances where an S Corporation shareholder is required to attach a basis schedule have significantly expended. Since almost all S Corporations make distributions to shareholders, it is anticipated that nearly all S Corporation shareholders are subject to this new provision.
Below is a screenshot of page 2 of Schedule E depicting the new checkbox:
IRS has indicated that it intends to begin sending notices to S Corporation shareholders that have not attached basis schedules to their 2018 returns. A draft of the form letter was recently published on the IRS website.
The Challenge
Calculating the S Corporation shareholder’s basis is important because it measures the amount the shareholder can withdraw or receive from the S Corporation without realizing income or gain. However, maintaining an accurate S Corporation basis is a challenge particularly in cases where shares are gifted to family members, or inherited upon death.
Historically, the task of tracking S Corporation basis has been neglected because when a profitable S Corporation makes distributions which are less than the taxable income of the Corporation, the number simply didn’t matter – until a major change happened i.e. change in shareholder’s ownership or the end of the Company’s life. The new requirement means that S Corporation shareholders and their tax preparers may have to dig through their historic records in order to create the basis schedules, going back the date when the stock was acquired. This could mean going back decades to when the stock was originally acquired (purchased or inherited).
Looking Forward
We strongly feel that maintenance of S Corporation basis schedule is a shareholder level responsibility. However, this is an area where the shareholders may request assistance from the S Corporations. Since the new requirement came out, a number of our S Corporation clients have been contacted by their shareholders who were looking for help in putting together their basis schedules.
S Corporations can assist by providing copies of the following documents to their shareholders:
- Copies of prior year K-1s
- Information on prior stock purchases
- Stock histories
- Information on direct loans from the shareholders
Some of our S Corporation clients have decided to maintain complete basis schedules for all shareholders with assistance from us. Please feel free to contact us with questions regarding S Corporation shareholder basis calculations and visit our blog to read more articles on related topics.
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