1120-S Form - Where can I locate the shareholders basis reconciliation since it's not shown on K-1?

Thanks for the explanation. I'm also struggling with this issue using UltraTax. Does the IRS not require S-corps to report beginning and ending basis somewhere? Seems like a major oversight considering how important basis is for determining the tax treatment of distributions and losses.

The IRS doesn't require S corporations to report basis directly on K-1s as they place that responsibility primarily on the shareholders. This is different from partnerships where the basis information is included right on the K-1. Form 7203 was introduced to help with this tracking, but it's not mandatory for all returns. The logic behind this approach is that shareholders should maintain their own basis records since personal transactions (like stock purchases outside the company) affect basis but wouldn't be known to the corporation. That said, most good tax software includes basis worksheets as supplemental information to help both preparers and shareholders track these important changes.

Does it work with scanned copies of old returns? I have a new client who just handed me a stack of poorly scanned 1120-S returns from the last 3 years and I need to figure out their basis before I can prepare this year's return.

I'm a bit dubious about AI tax tools. How accurate is it with complex basis adjustments like debt basis changes or suspended losses? Those calculations get tricky and I wouldn't want to trust an algorithm with something the IRS might scrutinize.

It works remarkably well with scanned documents - that's actually its specialty. It can process even lower quality scans and extract the relevant numbers you need for basis tracking. I've used it with returns going back several years with good results. The accuracy with complex basis adjustments has been impressive in my experience. It correctly handles debt basis changes, suspended losses, and special allocations. The system was trained on thousands of actual returns, so it recognizes patterns even in complex scenarios. I still review the results, but it's caught things I missed when doing manual calculations, especially with multiple-year carryovers of suspended losses.

How does this service actually work? I'm confused about why I'd need a third party to call the IRS - couldn't I just call the Practitioner Priority Line myself?

Sounds like a scam. Why would I pay someone to call the IRS for me? I doubt they have any special access that regular taxpayers don't have. Probably just putting you on hold the same way you would be if you called yourself.

The service works by using automated technology to navigate the IRS phone systems and wait in the queue for you. Once they get through to a human agent, you get a call back to connect with that live person. It's not that they have special access - they're just handling the waiting part for you. The Practitioner Priority Line is indeed an option if you're a tax professional, but even that line has had 1-2 hour wait times recently. What I found valuable was that I could continue working on other returns while Claimyr handled the waiting process, rather than sitting with a phone to my ear for potentially hours. It's really just about efficiency and not wasting billable hours on hold.

But doesn't Schedule L only show book values, not tax basis? My understanding is that AAA on M-2 isn't the same as shareholder tax basis since it doesn't include shareholder loans or stock basis from contributions. Am I misunderstanding something?

You're absolutely right that Schedule L shows book values rather than tax basis. That's a key distinction. The M-2 with the AAA account is indeed not the same as shareholder tax basis, though it's one component that helps track undistributed earnings. Tax basis includes initial stock contributions, additional capital contributions, loan basis, and other elements not fully captured in AAA. I should have been clearer that these schedules provide pieces of the puzzle but aren't a complete basis calculation themselves - they're just helpful reference points when reconstructing basis if you don't have a separate worksheet.

In ProTax, go to Forms -> Custom Forms -> Worksheets -> Client. There's an option to add "S Corporation Basis Worksheet" to the client package. It's not turned on by default but you can select it and it will print with the client copy. Been using this for years!

Thank you so much for this detailed explanation! As someone new to S-Corp returns, I really appreciate you breaking down the difference between stock basis and debt basis - that's something I definitely wasn't considering properly. I found the Shareholder Stock & Debt Basis worksheet in my ProTax under Supporting Schedules after reading your comment. You're absolutely right that it's not obvious where to find it! The debt basis component is eye-opening - I can see how missing that could cause major issues when shareholders have made loans to the corporation. One quick follow-up question: when a shareholder makes a loan to the S-Corp, does that immediately create debt basis, or does it only matter when losses need to be allocated against it? I want to make sure I'm tracking this correctly from the start rather than scrambling during loss years.

Great question! When a shareholder makes a bona fide loan to the S-Corp, it does create debt basis immediately - you don't have to wait for a loss year to start tracking it. The key is that it must be a legitimate loan with proper documentation (promissory note, reasonable interest rate, repayment terms, etc.). The debt basis equals the outstanding loan balance, and it's important to track this from day one because: 1. It affects the shareholder's total basis for loss limitation purposes 2. Loan repayments reduce debt basis (which could trigger gain if repaid when debt basis is zero) 3. Interest payments by the S-Corp to the shareholder are treated differently than principal repayments I'd recommend setting up the debt basis tracking as soon as the loan is made, even in profitable years. This way you have a complete picture when losses do occur, and you avoid the scramble to reconstruct the loan history later. The ProTax worksheet should have separate sections for stock basis and debt basis - make sure you're populating both from the beginning!

Welcome to the S-Corp world! It's great to see you've got this figured out now. I remember having the exact same confusion when I first started preparing 1120-S returns - coming from partnership returns where everything is laid out on the K-1, the S-Corp approach feels like something is missing. One additional tip as you're getting started: create a simple checklist for each S-Corp client that includes verifying you have all the basis components (initial contributions, additional capital contributions, any shareholder loans, prior year carryover basis). It's easy to miss something in year one that becomes a headache in year three when you need the complete basis history. Also, consider setting up a simple Excel template as backup documentation even when your software generates the basis worksheet. Some clients like to see the calculations in a simple format, and it's helpful during IRS examinations to have basis calculations in multiple formats. You'll thank yourself later when you have a clean paper trail showing exactly how you arrived at each year's basis numbers!

This is exactly the kind of practical advice that would have saved me so much time when I was starting out! The point about manually entering beginning basis in ProTax is crucial - I actually made that exact mistake on my first few S-Corp returns and had to go back and correct everything. Your suggestion about Form 7203 is really helpful too. I've been hesitant to use optional forms, but having that standardized IRS format for documentation makes a lot of sense, especially for audit protection. Do you typically generate Form 7203 for all your S-Corp clients, or only in certain situations like complex ownership structures or when you anticipate potential IRS scrutiny? Also, your comment about over-documenting really resonates. I'm learning that with S-Corp basis, it's much better to have too much documentation than to try to reconstruct years of basis calculations later when a client gets audited or changes preparers.

I use Form 7203 selectively rather than for every S-Corp client. I typically generate it when there are multiple shareholders with different ownership percentages, when there have been significant mid-year changes in stock ownership, or when the client has a history of aggressive tax positions that might attract IRS attention. For straightforward single-shareholder S-Corps with simple transactions, the supplemental basis worksheet is usually sufficient. But for anything involving debt basis utilization, suspended losses carrying forward, or situations where distributions exceed stock basis, I find Form 7203 provides that extra layer of documentation that gives both me and the client peace of mind. The key is being proactive about documentation. I've found that taking an extra 15-20 minutes to properly document basis calculations during preparation can save hours of reconstruction work later. And trust me, you don't want to be the preparer trying to explain to an IRS agent why you can't support the basis calculations that allowed $50,000 in losses to flow through to the shareholder's personal return!