Information on shareholder basis can be found in the instructions for Schedule K-1 (Form 1120-S) and Form 7203.
Per IRS Shareholder's Instructions for Schedule K-1 (Form 1120-S) Shareholder's Share of Income, Deductions, Credits, etc. (For Shareholder's Use Only), page 2:
Basis Limitations
Generally, the deduction for your share of aggregate losses and deductions reported on Schedule K-1 is limited to the basis of your stock and loans from you to the corporation. For details and exceptions, see section 1366(d). The basis of your stock is generally figured at the end of the corporation's tax year. Any losses and deductions not allowed this year because of the basis limit can be carried forward indefinitely and deducted in a later year subject to the basis limit for that year.
You are responsible for keeping the information needed to figure the basis of your stock in the corporation. Schedule K-1 provides information to help you figure your stock basis at the end of each corporate tax year. The basis of your stock (generally, its cost) is adjusted annually as follows and, except as noted, in the order listed. In addition, basis may be adjusted under other provisions of the Internal Revenue Code. You should generally use Form 7203, S Corporation Shareholder Stock and Debt Basis Limitations, to figure your aggregate stock and debt basis.
To enter into TaxAct be sure to select Basis Required on the K-1 Screen. Then download and fill out Form 7203.
During the efile section of TaxAct you will be prompted to upload your Form 7203.
You may not deduct a loss that is greater than your adjusted basis in a S corporation investment.
Your adjusted basis in a S corporation is generally:
-the initial cost of the investment in the or S corporation,
-plus any subsequent capital contributions,
-plus your share of or S corporation liabilities,
-less any distributions by the or S corporation to you,
-plus/less your distributive share of S corporation income and loss.
Your adjusted basis CANNOT go below zero. Any distributions in excess of your adjusted basis should be reported as capital gains on your tax return. After accounting for distributions, - any losses in excess of your adjusted basis are disallowed, and should be carried forward until you have basis to deduct against.
Shareholders are generally required to maintain a record of their adjusted basis in the S corporation investment. The S corporation does not always maintain these records for you, and is not required to do so.
If you have losses in excess of your adjusted basis in a S corporation, you will need to manually enter the amount of loss you are allowed to deduct. You will also need to manually track the un-allowed loss, and carry this amount forward to the following tax years.
See the IRS Form 7203 instructions, as well as IRS Publication 541 and IRS Publication 925 for more information.
Note that any link in the information above is updated each year automatically and will take you to the most recent version of the webpage or document at the time it is accessed.