How to Report Distributions in Excess of Basis on Form 8949

A distribution that exceeds your adjusted basis in an S-corporation or partnership is reported as a capital gain on Form 8949, and the totals flow to Schedule D of your Form 1040. Because no broker issues a 1099-B for this kind of transaction, you enter it in the section for unreported sales: Part I with Box C checked if you held the interest one year or less, or Part II with Box F checked if you held it longer. To report distributions in excess of basis on Form 8949 correctly, you need the excess amount, your acquisition date, the distribution date, and confirmation that your basis calculation follows the ordering rules the statutes require.

Confirm You Actually Have an Excess

Before filling out any form, verify that a taxable excess exists, because the sequence in which basis adjusts during the year can turn what looks like an excess into a fully covered distribution.

For S-corporation shareholders, stock basis adjusts as of the last day of the corporation’s tax year in this order: first increase basis for your share of income items and excess depletion; then decrease it for distributions; then for non-deductible, non-capital expenses and depletion; then for your share of losses and deductions. Income items get added before distributions come out, which frequently prevents a distribution from being classified as excess. Only stock basis matters for this test. Debt basis is relevant for deducting losses, not for measuring whether a distribution exceeds basis.¹

For partners, basis begins with what you contributed or paid, then increases for your distributive share of income (including tax-exempt income) and decreases for distributions and your share of losses.² Partners also adjust basis for their share of partnership liabilities. Once basis has been adjusted through income items, any money distributed beyond that figure is the recognized gain.³ For S-corporation shareholders, the excess beyond stock basis is likewise treated as a gain from selling the stock.⁴

The distribution figures come from Schedule K-1. Partnership distributions appear in Box 19 of Part III on Schedule K-1 (Form 1065).⁵ S-corporation non-dividend distributions appear in Box 16, Code D on Schedule K-1 (Form 1120-S). If you purchased the interest from another owner or inherited it, your outside basis may not match the entity’s records, and you are responsible for tracking the correct number.

One boundary worth flagging: if the S-corporation carries accumulated earnings and profits from a prior C-corporation period, distributions can pass through the accumulated adjustments account and produce a taxable dividend layer before any capital gain arises.⁴ The K-1 will normally reflect that split, but check it if the corporation has C-corporation history.

Filling Out Form 8949

Because no 1099-B is issued for a pass-through distribution, the transaction goes in the section for sales not reported to you on a broker statement.⁶ Choose Part I with Box C checked if your holding period was one year or less. Choose Part II with Box F checked if it was longer. Complete the columns as follows:

Description of property: something specific, such as “Distribution in Excess of Basis — [Entity Name].” A clear description helps the IRS match your entry against the entity’s informational filing and reduces the chance of a CP2000 notice.
Date acquired: the date you originally obtained your interest in the entity. For a gift, the donor’s holding period may tack on.
Date sold or disposed of: the date the distribution was made.
Proceeds: the amount of cash and fair market value of property distributed that exceeded your adjusted basis. Only the excess goes here, not the full distribution.
Cost or other basis: zero. The non-excess portion of the distribution has already reduced your basis to zero, so there is no remaining basis to offset the excess.
Gain: the excess amount, which will equal the proceeds figure.

Your holding period starts the day after you acquired the interest, and the distinction between short-term and long-term is not cosmetic. It determines whether the gain is taxed at ordinary rates or at the preferential capital gain rates discussed below.

Moving the Totals to Schedule D

Once Form 8949 is complete, the column totals transfer to Schedule D, which aggregates your capital gains and losses for the year and calculates the net result that flows onto Form 1040.⁷ A short-term excess goes into the short-term section of Schedule D; a long-term excess goes into the long-term section. If you have other capital gains or losses, they combine with the excess distribution before producing the final taxable amount.

Form 7203 for S-Corporation Shareholders

S-corporation shareholders who receive a non-dividend distribution must file Form 7203, S Corporation Shareholder Stock and Debt Basis Limitations, with their individual return.⁸ Part I walks through the stock basis calculation in the required order; Part II handles debt basis separately. The form replaced the older basis worksheet that used to appear in the K-1 instructions and is now the IRS’s standardized record of how your basis moved during the year.

Even in years when it is not strictly required, completing Form 7203 builds a running record. Shareholders who skip it and later face an audit often cannot reconstruct basis from prior years, and the IRS response in that case is to treat basis as zero and tax the whole distribution.

How the Gain Is Taxed

The statutes treat the excess as a gain from the sale or exchange of the ownership interest, so it receives capital gain treatment rather than ordinary income treatment.³ The rate depends on the holding period:

Short-term (one year or less): taxed at ordinary income rates, which range from 10% to 37%.
Long-term (more than one year): taxed at 0%, 15%, or 20% depending on your taxable income. For 2026, the 20% rate applies at $545,500 for single filers and $613,700 for joint filers.

Capital gain from an excess distribution also counts as net investment income. If your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly), an additional 3.8% surtax applies.⁹ Those thresholds are not indexed for inflation. The surtax is calculated and reported on Form 8960, filed with your Form 1040.¹⁰

Estimated Tax on the Gain

A meaningful excess distribution can produce a balance due at filing time. You generally must make estimated tax payments if you expect to owe at least $1,000 after withholding and credits, and your withholding will cover less than 90% of the current-year tax or 100% of the prior-year tax (110% if your prior-year adjusted gross income exceeded $150,000).¹¹ If the distribution lands in the middle of the year, you can annualize your income for the quarter it was received using the Annualized Estimated Tax Worksheet in Publication 505 and file Form 2210 with Schedule AI to match the payment to when the income arrived.

Records and Penalties

Keep the documents supporting your basis for at least three years after filing the return that reports the distribution, and longer for records that establish your original acquisition.¹² That means every K-1 you have received, purchase or contribution documentation, and each year’s Form 7203 or basis worksheet. If you acquired the interest from another owner, keep the records that establish your starting basis, because the entity’s books will not show it.

If the IRS audits and you cannot substantiate basis, the practical result is basis of zero and the entire distribution becomes taxable. A substantial understatement can trigger a 20% accuracy-related penalty on the underpayment.¹³ Any unpaid balance also accrues a failure-to-pay penalty of 0.5% per month, up to 25%.¹⁴

1
Internal Revenue Service. S Corporation Stock and Debt Basis
2
Office of the Law Revision Counsel. 26 USC 705 – Determination of Basis of Partners Interest
3
Office of the Law Revision Counsel. 26 USC 731 – Extent of Recognition of Gain or Loss on Distribution
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Office of the Law Revision Counsel. 26 USC 1368 – Distributions
5
Internal Revenue Service. Partners Instructions for Schedule K-1 Form 1065
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Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets
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Internal Revenue Service. Instructions for Form 8949
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Internal Revenue Service. About Form 7203, S Corporation Shareholder Stock and Debt Basis Limitations
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Office of the Law Revision Counsel. 26 US Code 1411 – Imposition of Tax
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Internal Revenue Service. About Form 8960, Net Investment Income Tax Individuals, Estates, and Trusts
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Internal Revenue Service. Large Gains, Lump Sum Distributions, Etc.
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Internal Revenue Service. How Long Should I Keep Records
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Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
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Internal Revenue Service. Failure to Pay Penalty