Form 7203 and S-Corp Share Repurchase
An S-Corp shareholder’s agreement stipulates that upon retirement, he must sell his shares back to the company in four equal installments over four years, with 1/4 of the shares each year.
The shareholder indicates that his basis is established by Form 7203 from the prior year (specifically Line 15), meaning we would need to use 1/4 of that amount as the basis for each installment. However, it’s important to note that this stockholder’s basis can fluctuate each year. So, what happens in years two, three, and four? Will our current determination hold true for all remaining years?
Additionally, does it matter that the shares were acquired at different times and prices over the years? Are there any adjustments needed to the basis as indicated on Form 7203?
Thank you!
One response
When a shareholder in an S-Corp sells their shares back to the company, it’s important to calculate their basis correctly for tax purposes. Here are some key points to consider regarding your situation:
Determining Basis: The basis for the shares sold back to the S-Corp is indeed derived from Form 7203, which tracks the shareholder’s stock and debt basis in the S-Corp. You will take the amount from Line 15 of the previous year’s Form 7203 and divide it by four, as the shareholder is selling 1/4 of their shares each year.
Yearly Adjustments: Each year, the shareholder’s basis will generally change due to various factors, including income, losses, dividends, and other adjustments reflected on the Form 7203. Therefore, while you will use 1/4 of the basis from the previous year for each of the first three sales, you will need to recalculate the basis for each subsequent year based on the updated Form 7203. This means that for years 2, 3, and 4, you will be using the new Line 15 from Form 7203 to determine the basis for the shares being sold that year.
Different Purchase Prices: If the shares were purchased at different times and at different prices, it may affect the basis depending on how the S-Corp maintains its records. Generally, the basis is combined into one overall basis for the stock held rather than tracking individual share purchases, unless specific share identification methods (like FIFO or LIFO) are being used. Any adjustments reflected on Form 7203 will account for distributions, contributions, and other factors related to the entire stockholding, not singular purchases.
Adjustments to Basis: There may be adjustments to the basis reported on Form 7203 due to S-Corp operations affecting the shareholder’s basis, such as income passed through, losses, or distributions taken. These changes need to be reflected in each annual calculation of basis.
In summary, each year’s share buyback transaction will require you to look at the updated basis from Form 7203 for that particular year. It’s critical to maintain accurate records and adjustments to ensure that the basis is correct for tax reporting purposes. If there’s uncertainty, consulting with a tax professional who understands S-Corp issues may provide additional insight tailored to your specific circumstances.