When does an S corporation shareholder have to file Form 7203?

The four triggers

The Form 7203 instructions say the form is filed by S corporation shareholders who:

1. claim a deduction for their share of an aggregate loss from the S corporation, including a loss carried over from last year because of basis limits
2. received a non-dividend distribution
3. disposed of S corporation stock, whether or not gain is recognized
4. received a loan repayment from the S corporation

Why basis matters

Under IRC §1366(d)(1), a shareholder's share of losses and deductions can't exceed their adjusted basis in the stock plus their basis in loans they made to the corporation. Losses disallowed for lack of basis carry forward indefinitely and are treated as incurred in the next year (IRC §1366(d)(2)).

Basis limits come first. The instructions list the order: basis limitations (Form 7203), then at-risk (Form 6198), then passive activity limits (Form 8582), then the excess business loss limit (Form 461).

Loan basis traps

The instructions flag two points on debt basis:

• Distributions don't reduce loan basis.
• A bank loan the shareholder guarantees or co-signs doesn't create loan basis. The shareholder gets basis only to the extent they actually make a payment under the guarantee (Treas. Reg. §1.1366-2(a)).

In years it isn't required

The instructions suggest completing and keeping Form 7203 even when it isn't required, so the shareholder's basis is maintained consistently year after year.