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How to complete Form 7203 and resolve diagnostic 56844 in ProConnect Tax

by Intuit•3• Updated 2 months ago

For more Schedule K-1 resources, check out our Tax topics page for Schedule K-1 where you'll find answers to the most commonly asked questions.

This article will help you:

Enter basis limitations for S-Corp K-1s.
Generate Form 7203, S-Corporation Shareholder Stock and Debt Basis Limitations.
Verify the form is attached for e-filing when required.

To enter basis limitation info in the individual return:

From Income, under Passthrough K-1's, go to S-Corp Info (1120S K-1).
From along the top of the workspace, select Basis.
In the Basis Limitation (7203) section, enter your client’s Stock basis at beginning of year to print on line 1.
- This entry is mandatory to generate the form.
The program will automatically calculate many of the increases and decreases based on your K-1 entries. You may need to enter the following items in this section, which aren’t automatically calculated:
- Basis from capital contributions made or additional stock acquired during year for line 2.
- Excess depletion adjustment for line 3j.
- Recapture of business credits for line 3l.
- Other items that increase stock basis for line 3m.
- Business credits (sections 50(c)(1) and (5)) for line 8c.
- Other items that decrease stock basis for line 13.

The program will only produce Form 7203 for K-1s where your client is claiming a loss, received a distribution, disposed of stock, or received a loan repayment. Other activities will still generate a Basis Limitation Worksheet to keep for your records.

To enter shareholder debt basis:

If your client only has one loan to the S-Corporation:

Enter the Loan balance at beginning of year, if any.
Select the Type of debt.
Enter any Additional loans made during the year that increased the outstanding balance of this loan.
Enter the Debt basis at beginning of year, if different from the loan balance at the beginning of the year.
If applicable, enter the amount of Adjustments to debt basis.

If your client has multiple loans to the S-Corporation:

Enter the total beginning balance for all loans in Loan balance at beginning of year.
Leave the Type of debt blank.
Enter the total of all Additional loans made during the year.
Enter the total Debt basis at beginning of year, if different from the total loan balance at the beginning of the year.
If applicable, enter the total Adjustments to debt basis for all loans.
Use the Shareholder Multiple Debt Basis grid to enter the details of each loan:
- Select the Type of debt.
- Enter the Loan balance at beginning of year.
- If applicable, enter Additional loans made during the year.
- If applicable, enter the Principal portion of debt repayment.
- Enter the shareholder’s Debt basis at beginning of year, if different from the loan balance at the beginning of the year entered on this line.
Verify that your grid totals equal the amounts you entered in steps 1-5.

Multiple debt basis example

If your client had more than three debts, additional form(s) 7203 will generate to show the loan details.

Attaching Form 7203 to the tax return:

ProConnect Tax will generate a critical diagnostic (Ref #56844) reminding you to attach this form as a PDF for e-filing. To generate the form as a PDF:

Go to the File Return tab.
Select Partial Print on the left side of the screen.
Check the box for 7203.
Click the Create PDF button.
Press Download PDF. The form will open in a new tab, where you can save it to your computer.
Go to the Input Return tab.
On the left-side menu, select General, then select Electronic Filing.
Click on the e-file PDF/Miscellaneous screen.
Select the e-file Attachment hyperlink at the top right.
Click on the Attach PDF button.
Locate the PDF on your computer in the window that appears.
Click Open.
Edit the Description of file (if desired).
In the Link to form (defaults to main form) drop-down, select Form 7203 to clear the diagnostics.

See here for more help attaching a PDF to the return.

Prior year information

For tax year 2021: Attaching Form 7203 to the tax return as a PDF

ProConnect Tax will generate a critical diagnostic (Ref #56844) reminding you to attach this form as a PDF for e-filing. To generate the form as a PDF:

Go to the File Return tab.
Select Partial Print on the left side of the screen.
Check the box for 7203.
Click the Create PDF button.
Press Download PDF. The form will open in a new tab, where you can save it to your computer.

Once the form is saved to your computer, go to the Check Return tab and click on the critical diagnostic beginning "Form 7203" to upload and attach your PDF. See here for help attaching a PDF to the return.

For tax year 2020 and prior: Using basis worksheet

The S-Corporate module in the program generates the Shareholder Basis Computation worksheet. Below are instructions on how to enter the information from the S Corporation worksheet into the S-Corp Info (1120S K-1) screen of the individual module. Click the three dots at the top of this screen and select Basis Information.

The line numbers in the following table refer to the line numbers on the Shareholder Basis Computation worksheet that the S-Corporate module produces:

Line number	Description
Line 1 Stock basis at beginning of tax year:	This amount should be entered in the Basis Limitation section in Adjusted basis at beginning of year (-1=none) (Click on button to expand) (MANDATORY) on the S-Corp Info (1120S K-1) screen. This input is required to trigger the basis schedules in the Individual program. If there is no stock basis at the beginning of the year, enter -1.
Lines 28 (Increases), 13-24 (Decreases):	These lines don't need to be entered into the Basis Limitation section of the S-Corp Info (1120S K-1) screen. The basis limitation will automatically pick up the income and losses from the S-Corp Info (1120S K-1) screen.
Lines 9 Net gain on disposition of Section 179 assets:	If there is an entry for "Net Gain on dispositions of 179 assets," information from the sale should be attached to the K-1 that the shareholder received. Use this information to enter the sale as described below in the "Tying gain entered on disposition screen to K-1" section below this table.
Line 10 Oil and gas depletion in excess of basis:	If oil and gas depletion in excess of basis has been input in the K-1 input screen, it will be included in the basis calculations automatically.
Line 11 Other Increases:	There are several items that can appear on line 11: 1. "Adjustment to restore debt basis" should not be input. The program will compute this automatically. 2. Adjustment for deemed dividends will be included automatically, if the dividend has been input in the K-1 input screen. If it has not, an increase to basis should be input in Other current year decreases to basis (Click on button to expand) on the S-Corp Info (1120S K-1) screen.
Line 25 Total foreign taxes:	If you have an amount on line 25, see the "Including foreign taxes in the basis limitations" section below this table.
Line 26 Section 59(e) expenses:	If the expenses from line 26 have been input in the S-Corp Info (1120S K-1) screen, they will be included in the basis calculations automatically.
Line 27 Prior year loss in excess of basis:	Amounts on line 27 of the Shareholders Basis Computation should be entered in the Basis Carryovers section of the S-Corp Info (1120S K-1) screen screen. This input is towards the bottom of the screen.
Line 28 Other Decreases:	There are several items that can appear on Line 28, Other decreases: a. If there is an amount with a description of "Loss in excess of basis," do not enter this amount in the S-Corp Info (1120S K-1) screen. It will be computed automatically. b. If there is an entry for "Loss from Section 179 assets", information about the sale should be attached to the Schedule K-1 that the shareholder received. Use this information to enter the sale as described below in the "Tying gain entered on disposition screen to K-1" section below this table. c. Any other decreases should be input in Other current year decreases to basis (Click on button to expand) on the S-Corp Info (1120S K-1) screen.
Line 29 Property distributions (including cash):	Amounts on line 29 of the Shareholders Basis Computation (reported on Scheduled K-1, Line 16) should be entered in (16D) Distributions in the Line 16 - Items Affecting Shareholder Basis section on the S-Corp Info (1120S K-1) > Lines 11-17 screen.
Lines 32 Debt basis at beginning of tax year:	Amounts on line 32 should be input in Debt basis at beginning of year, if different (-1=none) on the S-Corp Info (1120S K-1) screen. You must also enter the beginning principal amount of the loan in Principal amount of debt S Corporation owes shareholder at beginning of year on the S-Corp Info (1120S K-1) screen.
Line 33 Adjustments to Debt Basis:	There are several items that can appear on line 33, "Adjustments to debt basis": a. If there is an amount with a description of "Loans made to S Corp during tax year by shareholder," enter this amount in Loans made to S-corp during the year on the S-Corp Info (1120S K-1) screen. b. If there is an entry for "Adj. to restore debt basis from prior year losses/deductions," do not enter this amount in the S-Corp Info (1120S K-1) screen The program computes this amount in accordance with Internal Revenue code section 1367(b)(2)(B) which states that any net increase to basis increases debt basis before stock basis. "Net increases" is the amount by which current year income and other increases to basis exceed current and prior year losses, and other decreases to basis. c. If there is an amount with a description of "Loan repayments," enter this amount in (16E) Repayment of loans from shareholders under Line 16 - Items Affecting Shareholder Basis. d. If there is an amount with a description of "Losses/Deductions in excess of stock basis," do not enter this amount in the Schedule K-1 input screen. It will be computed automatically. e. Any other Decreases should be input in Other current year decreases to basis (Click on button to expand) on the S-Corp Info (1120S K-1) screen.

Gain recognized on repayment of loan: The Individual program will calculate the gain recognized on the repayment of a loan with a reduced basis. This will be calculated on the Shareholder Gain Recognized on Loan Repayment worksheet. The resulting amount will flow to the Schedule D, line 12.

Distributions in excess of basis:

If you have distributions in excess of basis, per Internal Revenue Code section 1368(b)(2), if the S-Corporation has no earnings and profits, this excess distribution is a capital gain. Enter the amount of the excess as a capital gain on the Dispositions (Sch D, etc.) > Schedule D/4797/etc. screen. Also enter this gain in Other current year increases to basis (Click on button to expand) under the Basis Limitation section of the S-Corp Info (1120S K-1) screen.

Tying gain entered on disposition screen to K-1:

To associate a disposition entered in Screen 17, Dispositions, with the basis calculations:

From the left of the screen, select Income, choose Dispositions (Sch D, etc.), and select Schedule D/4797/etc.
Add an asset and enter the basic sale information (description, date acquired, date sold, etc).
- This step isn't necessary if the K-1 transfer utility has already bridged the information for this sale into the Dispositions (Sch D, etc.) > Schedule D/4797/etc. screen.
Click the three dots and select Less Common Scenarios.
Scroll down to the Corresponding Activity Information - Passive (8582) / At-Risk (6198) / Investment Tax (8960) / Qualified Business Income (QBI) section.
For the Form number of related activity (Click on arrow to select from list) field, select 5= Schedule E (S-corporation).
Enter the name or number of the activity in Activity name or number (Click on arrow to select from list).
Mark the checkbox labeled Include in at-risk/basis limitations.

Including foreign taxes in the basis limitations:

To enter Foreign Transactions:

From the left of the screen, select Income and choose Passthrough K-1's.
Select S-Corp Info (1120S K-1).
From the top of the screen, select Lines 11-17.
Scroll down to the Line 14 - Foreign Transactions section.
Click the plus (+) button in the Foreign tax withheld (foreign currency) (Click on button to expand) field.
Complete the applicable fields:

Select the Form 1116 this is associated with in Form 1116 Name or Number.
Enter the name of the country that this information pertains to.
- When Form 1116 Name or Number is left blank, the program uses the entry in Name of Foreign Country, along with Category of Foreign Income, to determine which 1116 to send the foreign information to.
Enter the Category of Foreign Income as shown on Schedule K-1.
Shareholder Foreign Gross Income - Enter the partners foreign gross income, as shown on Schedule K-1. This amount will print on Form 1116, Part I.
Interest Expense Allocated to Foreign Sources - Enter the interest expense, as shown on Schedule K-1. This amount will print on Form 1116, Part I.
Other Foreign Deductions Apportioned or Allocated - Enter the interest expense, as shown on Schedule K-1. This amount will print on Form 1116, Part I.
Foreign Taxes Withheld (US Dollars) - Enter the foreign taxes withheld, in US dollars. This amount will print on Form 1116, Part II.
Foreign Taxes Withheld (Foreign Currency) - Enter the foreign taxes withheld, in foreign currency. This amount will print on Form 1116, Part II.
Date Paid or Accrued - Enter the date the taxes were paid or accrued. This amount will print on Form 1116, Part II.
Type of Income Withheld On - Enter type of income these foreign taxes were withheld on. This entry is needed to determine which category of income to report the withholding under on Form 1116, Part II. If the selection has (Accrued) next to it, as opposed to (Paid), then the accrued checkbox on Form 1116, Part II will be checked.

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