S-Corporation Sale of Stock

[Ryanvv126]

Is there a section in Form 1120S to put the sale of a stock of one owner? I know this would affect the basis, but is their anywhere else to put it?

Also, on the K-1 input if you bring in a new shareholder during the year, would you have to use the weighted averages to calculate the ownership percentage for that year? I'm guessing so.

Finally, when would you use the Special Allocation Percentages on the K-1 input screen? Just curious. Thanks!

I've been lurking on here for a while and have really seen some great tips and advice.

[Richcpaman]

Ryan:

Don't know all your answers, but did the Corporation buy the stock from the departing shareholder, or did the incoming or existing shareholder?

Rich

[Ryanvv126]

The incoming shareholder bought 25% of the stock from the sole shareholder of the s-corp

[Richcpaman]

21 minutes ago, Ryanvv126 said:

The incoming shareholder bought 25% of the stock from the sole shareholder of the s-corp

The sole Shareholder has a tax issue.  Nothing more in the corp.   Allocate income via percentage for the time before the buy in 250/365x(100%), and the time afterwards 115/365x (75%-25%).  Basic calculation.

If the shareholder then deposited the funds into the biz, that is a loan from S/H. 

If the Corp sold the share to the 25% SH, then you have other issues. 

Rich 

[Ryanvv126]

When would you use the Special Allocation Percentages on the K-1 input screen? Just curious. 

[Abby Normal]

13 hours ago, Richcpaman said:

deposited the funds into the biz, that is a loan from S/H

I don't do shareholder loans. Always goes is as additional paid in capital.

[OldJack]

On ‎3‎/‎13‎/‎2018 at 10:54 AM, Abby Normal said:

I don't do shareholder loans. Always goes is as additional paid in capital.

Why in the world would you show a shareholder loan as paid in capital.  That is what the IRS would prefer.  A shareholder loan can be paid back anytime without question, paid in capital cannot.  A loan can pay shareholder interest, paid in capital cannot.  Why would you ignore the intent of the shareholder?

 

[Abby Normal]

Most shareholder 'loans' are not really loans and are totally undocumented, and never repaid. Making them equity allows for stock basis, avoids imputed interest and gains on repayment of principal if debt basis was used for losses. Not to mention having to track debt basis. You put it in as capital, you take it out as distributions. Easy, peasy.

[Ryanvv126]

I never see shareholder "loan" paperwork. So this makes sense Abby.

[OldJack]

21 hours ago, Abby Normal said:

You put it in as capital, you take it out as distributions. Easy, peasy.

I think you misunderstand capital distributions.  When you have paid-in-capital, you have added basis to the shares of stock.  Even though it is shown on the financial statement separate from the other basis of stock (because of par value) it is for tax purposes an equal basis addition to the stock (like glue).  If you "take it out" you are actually distributing a fractional share of stock at fair market value, therefore any distribution would require a 1099 to report the FMV which is reported on 1040 Sch-D as capital gain or loss.  Determining FMV my require an outside appraisal.  Shareholder loan is easy, peasy to document and tax free to repay.  Also you may be ignoring the intent of the owner which is not your decision.

[Abby Normal]

I think you misunderstand my clients.

[OldJack]

3 hours ago, Abby Normal said:

I think you misunderstand my clients.

You may be right I don't know your clients, however, they are corporate shareholders and the rules for corporations are the same for all shareholders regardless if it is a C-corp, S-corp, or LLC electing corp status.  Capital distribution is a taxable event.

 

[jklcpa]

18 minutes ago, OldJack said:

You may be right I don't know your clients, however, they are corporate shareholders and the rules for corporations are the same for all shareholders regardless if it is a C-corp, S-corp, or LLC electing corp status.  Capital distribution is a taxable event.

 

That is not necessarily true. This topic is specific to S corps, and the S corp distribution rules and taxation of distributions depends on whether the company was formerly a C corp with E&P or if it was an S corp from inception. If formerly a C corp with E&P that convered to S status, the distribution might result in a taxable dividend.  If it has been an S corp from inception, the distribution may well be a tax-free return of basis if it doesn't exceed existing basis, and of course, that includes taking into account the ordering rules of basis changes in the current year. 

[OldJack]

Hi jklcpa, the distributions we were talking about was paid-in-capital which becomes a part of stock basis rather than income accumulation (retained earnings).  You are correct that distribution of accumulated retained earnings income is a different type of distribution.  Paid-in-Capital is not Retained Earnings.  From a tax standpoint there is no difference in distributing shares of stock or paid-in-capital.  Both are Capital Distributions not distribution of earnings.  S-corp distribution rules only apply to accumulated earnings.