The American Institute of CPAs is asking the Internal Revenue Service and the Treasury Department to develop a new income tax form to improve S corporation shareholder compliance with basis rules.

The AICPA sent a letter Tuesday proposing the form. It would be a required attachment to any income tax return filed by an S corporation and include items such as income, loss, deductions and credits. The goal would be to calculate the S corporation shareholder’s basis in the stock and debt of the S corporation correctly.

“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,” wrote AICPA Tax Executive Committee chair Annette Nellen in the letter.

Without such a form, she noted, taxpayers can improperly claim losses and deductions in excess of basis. They may also fail to report as taxable gain distributions or loan repayments in excess of basis, or inaccurately report gains or losses on dispositions of S corporation stock.

AICPA building in Durham, N.C.
AICPA building in Durham, N.C. Photo: AICPA

“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, adding that 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.”

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Michael Cohn

Michael Cohn

Michael Cohn, editor-in-chief of AccountingToday.com, has been covering business and technology for a variety of publications since 1985.