Prepare to change your 2021 S Corporation Client Letter. Item D has been added to Part I of the 2021 Form 1120-S Schedule K-1 for use in reporting the corporation’s total number of shares for the beginning and end of the tax year. Ask your client for the share information now and look for the change on your input forms.
Since no actual incorporation takes place, no shares are issued when an LLC elects to be taxed as an S corporation (S Corp). What goes on Item D? The instructions state that an entity without stock, such as an LLC, should enter the number of units or other equivalent to S Corp stock. So, if you and I are 50/50 owners, we would enter 50 shares for each of us. If three of us own the S Corp equally, we would enter 333, 333, and 334 as the number of shares.
As you continue through this eTax alert, you’ll learn more about why you should consider changing your client letter with information on Form 7203 and a new attachment to the K-1.
New Form 7203 Requirement
Form 7203 is a new form requirement for some S Corps. The form’s separate instructions were developed by the IRS 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 Form 1120-S, Schedule K-1.
NOTE: Form 7203 is still in its draft form. The IRS informs advisors “to not file draft forms and do not rely on draft forms, instructions, and publications for filing.”
S corporation shareholders who will need to file are:
Planning. While the new Form 7203 is required for shareholders, if they are claiming a loss or have distributions in excess of basis, it should be completed for all shareholders in order to maintain a record of basis over the years. Look for revisions to the basis input sheets for your tax software.
A New Attachment to the Schedule K-1
The IRS wants a new attachment to the K-1 to report certain information related to PPP Loan Forgiveness.
The forgiveness of a PPP loan creates tax-exempt income, which in turn affects a shareholder’s basis in the S Corp. Rev. Proc. 2021-48 permits S Corps to treat tax-exempt income resulting from the forgiveness of the PPP loan as received or accrued …
- as, and to extent that, eligible expenses are paid or incurred
- when the S Corp applies for forgiveness of the PPP loan
- when the forgiveness of the PPP loan is granted
New required statement. Tax-exempt income from the forgiveness of a PPP loan is reported on Line 16(b) of Schedule K. The instructions to the Form 1120-S require that the entry on Line 16(b), Other Tax-Exempt Income, be supported by a statement attached to the return for each tax year in which the S Corp is applying Rev. Proc. 2021-48 to PPP loan forgiveness.
The statement should include the following information for each PPP loan:
- The S Corp’s name, address, and EIN;
- A statement that the S Corp is applying section 3.01(1), (2), or (3) of Rev. Proc. 2021-48, as applicable;
- The amount of tax-exempt income from forgiveness of the PPP loan that the S Corp is treating as received or accrued during the tax year; and
- Whether forgiveness of the PPP loan has been granted as of the date the return is filed.
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Amending for 2020
Amending 2020 for basis adjustment.
An S Corp that didn’t report tax-exempt income from a PPP loan on its 2020 return may file an amended return to apply Rev. Proc. 2021-48. Since the tax-exempt income adds to a shareholder basis, you may want to amend the 2020 Form 1120-S return (and the shareholder’s Form 1040) if losses were limited to basis.
No 2020 amendment simply to attach statement.
An S Corp that reported tax-exempt income from a PPP loan on its 2020 return, the timing of which corresponds to one of the options presented in Rev. Proc. 2021-48, does not need to file an amended return solely to attach the statement that is described in the instructions for Schedule K, line 16(b).