Form 7203 and share repurchase from S-Corp

[eva]

Form 7203 and share repurchase from S-Corp

S-Corp shareholder's contract demands that at age of retirement he sells back his shares ratably in four years, 1/4 each year to the company.

Evidently his basis is determined by Form 7203 of the previous year (Line 15.) We just have to take 1/4th of that number for basis. This stockholder basis will change every year though. So what happens in year 2,3,4? Or what we determine now will stand for all the years remaining, meaning 1/4th of his 2024 figure from 7203?

Does it matter that the stocks were purchased at different times at different prices throughout the years? Are there any adjustments to the basis found on Form 7203?

Thank you!

[sjrcpa]

Technically, the basis used is that immediately before sale. So unless the sale took place at Jan 1 12:00 AM or Dec 31 11:59 PM you can't use the 7203.

Start with the beginning of year basis and add/subtract/prorate somehow through the date of sale. Then divide by 4. Then reduce the amount on the 7203 by this. Do a spreadsheet for the computation.

Repeat each year.

Don't forget to reduce AAA accordingly, too.

[eva]

Doesn't it cause higher and higher basis every year? I.e. in the second year of this repurchase by the company, his basis will be rather high (this is a very large S-Corp with substantial earnings each year) but only three years left.  So if I divide the stock basis by 3 in year 2, and then by 2 in year 3, and the full stock basis in yr 4, he is going to get a higher and higher basis. Of course, it will be somewhat reduced by the decrease of stock ownership, but as I mentioned the company is paying him higher and higher ordinary income and interest as well.

Please correct me if I am talking nonsense here. 🙂

Also, regarding the AAA. I have no access to that as I only receive the K-1. That reduction will be done by the company itself.

Thank you!

[sjrcpa]

Yes his basis will increase by his share of income each year. But it gets reduced by distributions, too. 

Ignore the AAA remark. Didn't realize you were only doing the shareholder's return.