As you might be aware, there have been new requirements in the 2021 filings for the S Corporations. In the last few years, new tax requirements have been issued just before tax season or during tax season, giving tax preparers little time to comply with the new disclosure or tax processing for those returns.
Disclosure of the number of shares
In the 2021 K1 for the S Corporation, there is a disclosure for the number of shares. Note that if the company was originally registered as a Corporation and filed the S Corporation election, the number of shares should have been disclosed in the by laws.
However, if the S Corporation was created through an S Corporation election (LLC converted to S Corporation for tax purposes using form 2553 and whatever other forms at the State level, when necessary), then, the number of shares might reflect the percentage of membership in the previous partnership or LLC. For example, if Joe and Jane were 50% members of the LLC, then, you can indicate that Joe and Jane had 50 shares each.
Link K1 2021 format – https://www.irs.gov/pub/irs-pdf/f1120ssk.pdf
Potential new form to replace the Worksheet for Figuring a Shareholder’s Stock and Debt Basis
The IRS has focused on the last couple of years to ensure the basis for members (LLC / Partnership) and shareholders (S Corporation) for pass through entities report appropriately the basis. In the past, there was not enough control by the IRS on basis, and taxpayers might have been not reporting appropriately the basis and not paying taxes accurately. Example: if a shareholder has a distribution above his/her basis, then, capital gains should be paid on the excess. You could not distribute more than what the company generated plus initial basis without paying that extra capital gain.
As of the date of this post, the form 7203 is still in draft mode and there is a message of “do not file”. Consequently, we are not sure if this form will be required for the 2021 filing (Deadline mid March 2022).
Link form 7203 – https://www.irs.gov/pub/irs-dft/f7203–dft.pdf
Revenue Procedure 2021-48
On November 18, 2021, different revenue procedures were released 48, 49 and 50. The procedure 48 deals with amended tax returns and timing issues for recognizing PPP loan forgiveness.
The statement should include the following information for each PPP loan for S Corporations:
- 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.
Link Revenue Procedure 2021-48 – https://www.irs.gov/pub/irs-drop/rp-21-48.pdf
We will keep you informed on new updates and forms for business tax returns.