The American Institute of CPAs (AICPA) has recommended to the U.S. Department of the Treasury and the Internal Revenue Service (IRS) that a new income tax form be developed in order to improve S corporation shareholder compliance with the basis rules under subchapter S (section 1367 of the Internal Revenue Code).
The form proposed by the AICPA in its February 21 letter would be a required attachment to any income tax return and would include items of income, loss, deduction or credit of an S corporation. The purpose of the form would be to compute the S corporation shareholder’s basis in the stock and debt of the S corporation.
“Without accurate tracking of shareholder stock and debt basis, a taxpayer may not know whether he or she is entitled to deduct losses flowing from the S corporation or whether distributions and/or loan repayments from the S corporation to the shareholder are taxable or nontaxable,” Annette Nellen, CPA, CGMA, Esq., chair of the AICPA Tax Executive Committee, explained in the letter. The result, Nellen wrote, is that taxpayers may improperly claim losses and deductions in excess of basis, fail to report as taxable gain distributions or loan repayments in excess of basis, and/or report inaccurately gains or losses on dispositions of S corporation stock.
“We believe that a significant contributing factor to S corporation shareholders claiming losses in excess of basis is that S corporation shareholders are not required to attach a form, to his or her income tax return, on which their basis in the S corporation is computed and the loss limitation rules are applied,” Nellen wrote.
The form would provide “shareholders and the IRS with the information necessary to properly determine the taxability of distributions and loan repayments made by the S corporation to its shareholders, gain or loss on stock dispositions, as well as the amount of losses and deductions that shareholders are allowed to take into account when computing taxable income for the year,” Nellen stated.