i7203--2021-12-00

Instructions for Form 7203

Department of the Treasury
Internal Revenue Service

(December 2021)

S Corporation Shareholder Stock and Debt Basis Limitations
Section references are to the Internal
Revenue Code unless otherwise noted.

Future Developments

For the latest information about
developments related to Form 7203
and its instructions, such as
legislation enacted after they were
published, go to IRS.gov/Form7203.

What's New

Form 7203 and its separate
instructions are developed to replace
the 3-part Worksheet for Figuring a
Shareholder’s Stock and Debt Basis
and its related instructions formerly
found in the Shareholder's
Instructions for Schedule K-1 (Form
1120-S).

General Instructions
Purpose of Form

Use Form 7203 to figure potential
limitations of your share of the S
corporation's deductions, credits, and
other items that can be deducted on
your return.

Who Must File

Form 7203 is filed by 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.
It may be beneficial for

TIP shareholders to complete and

retain Form 7203 even for
years it is not required to be filed, as
this will ensure their bases are
consistently maintained year after
year.

Jan 18, 2022

Limitations on Losses,
Deductions, and Credits

There are potential limitations on
corporate losses that you can deduct
on your return. These limitations and
the order in which you must apply
them are as follows: the basis
limitations, the at-risk limitations
(Form 6198), the passive activity loss
limitations (Form 8582), and the
excess business loss limitations
(Form 461). See the Shareholder's
Instructions for Schedule K-1 (Form
1120-S) for details.

Basis Limitations

Generally, the deduction for your
share of aggregate losses and
deductions reported on Schedule K-1
(Form 1120-S) is limited to the basis
of your stock and loans from you to
the corporation. For details and
exceptions, see section 1366(d). The
basis of your stock is generally figured
at the end of the corporation's tax
year. Any losses and deductions not
allowed this year because of the basis
limit can be carried forward
indefinitely and deducted in a later
year subject to the basis limit for that
year.
You are responsible for keeping the
information needed to figure the basis
of your stock in the corporation.
Schedule K-1 (Form 1120-S) provides
information to help you figure your
stock basis at the end of each
corporate tax year. The basis of your
stock (generally, its cost) is adjusted
annually as follows and, except as
noted, in the order listed. In addition,
basis may be adjusted under other
provisions of the Internal Revenue
Code. You should generally use this
form to figure your aggregate stock
and debt basis.
1. Basis is increased by (a) all
income (including tax-exempt income)
reported on Schedule K-1 (Form
1120-S), and (b) the excess of the
deduction for depletion (other than oil
and gas depletion) over the basis of
the property subject to depletion.

Cat. No. 74861H

You must report on your
return (if you are required to
CAUTION file one) any amount required
to be included in gross income for it to
increase your basis.

!

2. Basis is decreased (but not
below zero) by (a) property
distributions (including cash) made by
the corporation reported on
Schedule K-1 (Form 1120-S), box 16,
code D, minus (b) the amount of such
distributions in excess of the basis in
your stock.
3. Basis is decreased (but not
below zero) by (a) nondeductible
expenses, and (b) the depletion
deduction for any oil and gas property
held by the corporation, but only to the
extent your share of the property's
adjusted basis exceeds that
deduction.
4. Basis is decreased (but not
below zero) by all losses and
deductions reported on Schedule K-1
(Form 1120-S).
You may elect to decrease your
basis under (4) prior to decreasing
your basis under (3). If you make this
election, any amount described under
(3) that exceeds the basis of your
stock and debt owed to you by the
corporation is treated as an amount
described under (3) for the following
tax year.
To make the election, attach a
statement to your timely filed original
or amended return that states you
agree to the carryover rule of
Regulations section 1.1367-1(g) and
the name of the S corporation to
which the rule applies. Once made,
the election applies to the year for
which it is made and all future tax
years for that S corporation, unless
the IRS agrees to revoke your
election.
The basis of each share of stock is
increased or decreased (but not
below zero) based on its pro rata
share of the above adjustments. If the
total decreases in basis attributable to
a share exceed that share's basis, the
excess reduces (but not below zero)
the remaining bases of all other

shares of stock in proportion to the
remaining basis of each of those
shares.
Basis of loans. The basis of your
loans to the corporation is generally
the balance the corporation owes you,
adjusted for any reductions and
restorations of loan basis. See the
instructions for box 16, code E, in the
Shareholder's Instructions for
Schedule K-1 (Form 1120-S). Any
amounts described in (3) and (4),
earlier, not used to offset amounts in
(1), earlier, or to reduce your stock
basis, are used to reduce your loan
basis (to the extent of such basis prior
to such reduction).

!

CAUTION

When determining your basis
in loans to the corporation,
remember that:

• Distributions don't reduce loan
basis, and
• Loans that a shareholder
guarantees or co-signs aren't part of a
shareholder's loan basis.
Shareholders only obtain basis from
acting as a guarantee or in a similar
capacity to the extent the shareholder
makes a payment pursuant to the
guarantee.
See Regulations section
1.1366-2(a) and section 1367 and its
regulations for more details.

Specific Instructions
Stock block. When a

TIP shareholder has a different

basis in different blocks of
stock, pass-through items are
generally allocated pro rata to all
shares, regardless of their different
bases. If there is a partial stock sale or
partial redemption, you may file more
than one form and provide a
description of what period the form
covers. See Regulations section
1.1367-1(b)(2) and (c)(3) for details.

Part I. Shareholder Stock
Basis
Part I of Form 7203 addresses
adjustments to stock basis as
CAUTION provided under section 1367.
Other code sections might also cause
a reduction in S corporation stock
basis.

!

Line 1. Enter your basis in the stock
of the S corporation at the beginning
of the corporation’s tax year. Unless
this is your initial year owning stock in
the S corporation, this amount should
be the same as your ending stock
basis from the prior tax year.
Stock basis can’t be less than zero.
Don’t include any basis from
indebtedness on this line. Stock basis
and debt basis must be figured
separately. Debt basis is addressed in
Part II of this form.
Line 2. Enter any additional
contributions to the capital of the
S corporation or any additional
acquisitions of stock. Don’t include
any loans to the S corporation.
The basis of stock you purchased
is usually its cost.
If you contributed property to the
S corporation in exchange for stock in
a section 351 transaction, your stock
basis is generally figured by taking the
carryover basis of assets transferred
to the corporation, less the liabilities
assumed by the corporation. If the
assumed liabilities exceed the
adjusted tax basis of the contributed
assets, see section 357(c). See
section 358 for more information on
the basis of stock received in a
section 351 transaction.
The basis of inherited property is
generally the fair market value (FMV)
at the date of death or the alternate
valuation date. See section 1014 and
Regulations section 1.1014-4.
The basis of stock acquired by gift
is generally the basis of the stock in
the hands of the donor. There are
special rules if the FMV of the stock is
less than the donor’s adjusted basis.
See Regulations sections 1.1015-1,
1.1366-2(a)6), and 1.1366-2(a)(7).
The basis for stock received as
compensation is the FMV on the date
the compensation is included in
income. See Pub. 551 for details.
Line 3. Enter on lines 3a through 3m
all separately figured and
non-separately figured items of
income from Schedule K-1 (Form
1120-S). See below for specific
instructions.
Reminder. Enter only positive
amounts from Schedule K-1 (Form

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1120-S) on line 3. Negative amounts
(decreases to stock basis) are
entered in Part III.
Line 3i. Enter the amount of other
income that increases basis.
Under Notice 2020-69, increase
stock basis under section 961(a)
when the U.S. shareholder has a
subpart F inclusion (as defined in
section 959(a)(2)) or global intangible
low-taxed income (GILTI) inclusion
amount (as defined in section 951A)
attributable to an S corporation-owned
controlled foreign corporation (CFC).
Line 3j. Enter the amount by which
your cumulative depletion deduction
exceeds your proportionate share of
basis in the property subject to
depletion. See information reported in
Schedule K-1 (Form 1120-S), box 15,
using code C.
For oil and gas depletion, don’t
enter an amount. See the instructions
for line 8b for the decrease to basis.
Line 3k. Enter the sum of the
amounts from Schedule K-1 (Form
1120-S), box 16, codes A and B.
Basis isn’t increased by
excluded discharge of
CAUTION indebtedness income of the
S corporation under sections 108(a)
and 108(d)(7)(A).

!

The income reported on line 3
should be reported on the appropriate
areas of your return. See the
Shareholder's Instructions for
Schedule K-1 (Form 1120-S) for
details.
Line 6. Enter the distributions
reported on Schedule K-1 (Form
1120-S), box 16, code D. Don’t
include any Form 1099-DIV
distributions (dividend distributions
from the accumulated earnings and
profits while a C corporation) on this
line.
Note. If the amount of the distribution
is more than the stock basis before
distributions, report the excess
amount as a capital gain on Form
8949, Sales and Other Dispositions of
Capital Assets, and Schedule D. Don’t
increase your stock basis for the
amount of capital gain reported for the
excess. See Nondividend
distributions in the Instructions for
Form 8949.

Instructions for Form 7203 (December 2021)

Leave lines 8a, 8b, and 8c
blank if you made an election
CAUTION under Regulations section
1.1367-1(g). If an election was made,
enter this information on line 13.

!

Line 8a. Enter the amount from
Schedule K-1 (Form 1120-S), box 16,
code C.
Line 8b. Enter the amount of oil and
gas depletion claimed on your
personal return up to your
proportionate share of basis in the
property subject to depletion. Any
cumulative depletion in excess of your
proportionate share of basis in the
property subject to depletion won’t
reduce your basis.
Don’t enter an amount for depletion
not related to oil and gas property.
Line 8c. Certain credits require the
reduction of both an S corporation's
assets as well as the shareholder's
stock basis. See sections 50(c)(1)
and (5) for details.
Line 11. Use Part III to figure the total
allowable loss and deduction items
from stock basis. Enter the total from
line 47, column (c). This amount can’t
exceed the amount on line 10.
Line 12. Use Part II to figure the debt
basis restoration, if any. Enter the total
from line 23.
Line 13. Enter any other decreases
to stock basis not accounted for on
the lines above. This includes the
reduction to basis for the sale or
redemption of part of your stock. If an
election is made under Regulations
section 1.1367-1(g), enter the
amounts on this line as instructed on
line 8, including any prior year
carryover amounts.
If a portion of your stock is

TIP redeemed, sold, or otherwise

disposed of during the year,
attach two separate forms. Use the
first to figure your stock basis at the
date of sale and the second to figure
your stock and debt basis at year end.

Part II. Shareholder Debt
Basis
If you have more than three

TIP loans, use additional copies of

Part II. List the total sum of all
loans on the first page only.

You must complete this section if
you have personally loaned money to
the corporation.
You must account for each formal
note (notes with a written instrument)
made to your S corporation by
entering it separately in its own
column. You can’t aggregate multiple
loans into a single column. If you have
more than three loans, use additional
copies of Part II.
Loans made to the S corporation
that aren’t evidenced by a written
instrument are referred to as an open
account debt and aren’t separately
tracked. If an open account debt has a
year-end balance of more than
$25,000, it will be classified as a
formal note at the beginning of the
next tax year and must be separately
tracked.
Loans that a shareholder
guarantees or co-signs aren’t
CAUTION part of a shareholder’s loan
basis except to the extent the
shareholder makes a payment on the
loan guaranteed or co-signed.

!

Line 16. Enter the balance of each
loan to the S corporation at the
beginning of the corporation’s tax year
in a separate column.
Line 17. Enter any new loans made
during the tax year and evidenced by
a formal note in a separate column. If
a formal note is refinanced, any
increase should be entered on line 17
under the same column as the original
loan.
Advances and repayments made
during the S corporation’s tax year on
an open account are netted at the
close of the S corporation’s tax year to
determine the amount of any net
advance or net repayment. See
Regulations section 1.1367-2(d)(2).
Enter any net advances on line 17
under the same column as the open
account debt. If this is the first year of
the open account debt, enter the net
advance in its own column on line 17.
Any debt that exceeded
$25,000 at the end of the prior
CAUTION year is treated as a formal
note for purposes of calculating the
gain on loan repayment. See
Regulations section 1.1367-2(a)(2)(ii).

!

Line 19. For a formal note, enter the
amount of principal repayment
specific to each loan.

Instructions for Form 7203 (December 2021)

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For open account debt, if the
repayments exceed the advances for
the tax year, the net repayment should
be entered on line 19.
Line 21. Enter the debt basis of your
loan(s) to the S corporation at the
beginning of the corporation’s tax
year.
Line 22. Enter the amount from
line 17 on line 22.
Line 23. You have reduced debt
basis if line 21 is less than line 16.
Per section 1367(b)(2)(B), if debt
basis has been reduced, it can only
be restored with a net increase. The
net increase is the amount by which
the items that increase stock basis per
section 1367(a)(1) (for example,
income, tax-exempt income, and
excess depletion) exceed the items
that decrease stock basis per section
1367(a)(2) (for example, losses,
deductions, nondeductibles,
nondividend distributions, etc.). See
Regulations section 1.1367-2(c)(1).
The net increase is figured as
follows:
Line 4
Minus line 6
Minus line 9
Minus line 13 (as applicable)
Minus line 47(a)
Minus line 47(b)
If the net increase figured exceeds
the total reduction in debt basis
(line 16 minus line 21), then the
restoration is limited to the amount
needed to restore debt basis to the
face of the loan.
If you have multiple debts, the
net increase is applied first to
CAUTION restore the reduction of basis
in any debt repaid in the tax year to
the extent necessary to offset any
gain that would otherwise be realized.
Any remaining net increase is applied
to each debt in proportion to its
reduced basis. See Regulations
section 1.1367-2(c)(2).

!

Line 28. Enter the smaller of the
nondeductible expenses and oil and
gas depletion deductions in excess of
stock basis (line 9 minus line 7) or
line 27.
Nondeductible expenses in excess
of stock and debt basis don’t carry
forward (unless an election under

Regulations section 1.1367-1(g) is
made).
Line 30. Enter the amount from
line 47(d) in the total column on
line 30.
If you have more than one
loan to the corporation, any
CAUTION allocated reduction is prorated
to the loans based on the ratio that
each individual loan basis bears to the
aggregate bases of the loans. See
Regulations section 1.1367-2(b)(3).

!

Line 34. The character of the gain on
repayment is dependent on whether
the debt is evidenced by a formal note
or is an open account.
Debt evidenced by a formal note
will result in capital gain, and should
be reported on Form 8949 and
Schedule D.
Any open account debt (including
debt referenced in Regulations
section 1.1367-2(a)(2)(ii)) will result in
ordinary gain and should be reported
on Form 4797, Sales of Business
Property.

!

CAUTION

Gain recognized on loan
repayment doesn’t increase
basis.

Part III. Shareholder
Allowable Loss and
Deduction Items

The corporate losses and other
deduction items are limited to the sum

of your stock and debt basis. When
stock and debt basis is insufficient,
and there is more than one type of
loss or deduction item that reduces
basis, the amounts allowed as a loss
or deduction are allocated on a pro
rata basis. See Regulations sections
1.1366-2(a)(4) and (5).
Loss and deductions in excess of
basis are suspended and carried
forward indefinitely and the character
of the loss and deduction items is
retained.
Part III shows the pro rata
allocation and tracks any loss or
deduction carryforward.
Column (a). Enter the loss and
deduction amounts for each item as
reported on your Schedule K-1 (Form
1120-S).
Column (b). Enter any loss or
deduction items disallowed due to
basis limitations in prior years that
were carried forward.
Column (c). If line 10 is zero, skip
column (c).
If stock basis, as reported on
line 10, is greater than the sum of
column (a) and column (b), line 47,
enter the sum of each line for column
(a) plus column (b) in column (c). If
stock basis, as reported on line 10, is
less than the sum of column (a) and
column (b), line 47, enter the pro rata
amount on the corresponding line in
column (c). The total allocation

amount reported in column (c),
line 47, can’t exceed the amount
reported on line 10.
Column (d). If line 29 is zero, skip
column (d).
If column (c), line 47, is less than
line 10, skip column (d).
If debt basis, as reported on
line 29, is greater than column (a) plus
column (b) minus column (c), line 47,
enter column (a) plus column (b)
minus column (c), in column (d) for
each line item. If debt basis, as
reported on line 29, is less than
column (a) plus column (b) minus
column (c), line 47, enter the pro rata
amount on the corresponding line in
column (d). The total allocation
amount reported in column (d),
line 47, can’t exceed the amount
reported on line 29.
The allowable losses and
deductions from columns (c) and (d)
should be reported on the appropriate
areas of your return (subject to any
additional limitations).
Column (e). If the sum of column (a)
plus column (b) exceeds the sum of
column (c) plus column (d), enter the
excess in column (e) for each line
item. If you disposed of all your stock,
see Regulations section 1.1366-2(a)
(6).

Paperwork Reduction Act Notice. We ask for the information on this form to carry out the Internal Revenue laws of the
United States. You are required to give us the information. We need it to ensure that you are complying with these laws
and to allow us to figure and collect the right amount of tax.
You are not required to provide the information requested on a form that is subject to the Paperwork Reduction Act
unless the form displays a valid OMB control number. Books or records relating to a form or its instructions must be
retained as long as their contents may become material in the administration of any Internal Revenue law. Generally, tax
returns and return information are confidential, as required by section 6103.
The time needed to complete and file this form will vary depending on individual circumstances. The estimated burden
for individual and exempt organization taxpayers filing this form is approved under OMB control number 1545-0074 and
1545-0047 and is included in the estimates shown in the instructions for their individual and exempt organization tax
return. The estimated burden for all other taxpayers who file this form is shown below.
Recordkeeping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2 hr., 10 min.

Learning about the law or the form . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15 min.

Preparing and sending the form to the IRS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 hr., 21 min.

If you have comments concerning the accuracy of these time estimates or suggestions for making this form simpler,
we would be happy to hear from you. See the instructions for the tax return with which this form is filed.

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Instructions for Form 7203 (December 2021)