Glen Birnbaum, CPA pointed out on Twitter on February 15, 2019 an item referenced in RIA’s Federal Tax Update the same day regarding a new check box has appeared on Schedule E of Form 1040 that applies to S corporation shareholders. The IRS posted information about this change on its website in an article titled “Clarification on line 28, column (e), of Schedule E (Form 1040)” on February 6, 2019.
The page provides:
As stated in Part II of the Schedule E (Form 1040), a taxpayer who owns an interest in an S corporation and reports a loss, receives a distribution, disposes of stock, or receives a loan repayment from the S corporation must check a corresponding box under line 28, column (e), and attach a computation detailing their S corporation basis. The discussion about basis rules for S corporations in the Instructions for Schedule E (Form 1040) for Parts II and III does not limit or modify this requirement.
First, this page highlights a new checkbox on Schedule E, but it also provides additional clarification beyond what is given in the Schedule E instructions for the box. The instructions provide a more limited case for when a basis schedule is required:
If you are claiming a deduction for your share of an aggregate loss, check the box on the appropriate line in Part II, column (e), and attach to your return a computation of the adjusted basis of your corporate stock and of any debt the corporation owes you. For details, see the Shareholder's Instructions for Schedule K-1 (Form 1120S).
The IRS is referring to the box (e) shown below on line 28 of Part II from page 2 of 2018 Schedule E (Form 1040).
The requirement to attach a basis schedule to the Form 1040 for an S shareholder claiming a loss is not new. The 2017 Schedule E Form 1040 instructions provided, as they had for a number of years before 2017:
If you are claiming a deduction for your share of an aggregate loss, attach to your return a computation of the adjusted basis of your corporate stock and of any debt the corporation owes you. For details, see the Shareholder’s Instructions for Schedule K-1 (Form 1120S).
Advisers who are preparing individual returns for S corporation shareholders will need to note the expanded list of situations when a basis computation must be attached to the tax return and assure the schedules are attached.