S-Corp dissolution

[JJStephens]

I have very little experience with S-Corps and none with a dissolution. Any help will have my deep gratitude.

Single owner has been in declining health for several years. The biz has never been particularly profitable and has shown a loss each of the past 5 or 6 years, resulting in a negative AAA. Small distributions (a few hundred dollars) during those years were treated as LTCGs.

The owner died near the end of 2024. It's assets and inventory were negligible (less than $200) and were given to the owner's son who is in a similar biz.

How do I handle the negative AAA? Is there anything else I need to address?

[Lee B]

2 hours ago, JJStephens said:

..... It's assets and inventory were negligible (less than $200) and were given to the owner's son who is in a similar biz.

The assets come out at FMV which when I have prepared one of these resulted in taxable gains.

[DANRVAN]

6 hours ago, JJStephens said:

I have very little experience with S-Corps and none with a dissolution

 

6 hours ago, JJStephens said:

Is there anything else I need to address?

To be honest, you need to ask yourself if you are qualified for this engagement.  

4 hours ago, Lee B said:

The assets come out at FMV which when I have prepared one of these resulted in taxable gains.

 If the stock is stepped to FMV at DOD, the gain passed through should be offset by a capital loss upon liquidation, due to the difference between inside and outside basis.  It is critical that the distribution and dissolution occur in the same year.

[Abby Normal]

16 hours ago, JJStephens said:

How do I handle the negative AAA

I've never seen any purpose for AAA. Stock basis is all that really matters.

The gain on removal of the assets, if any, will increase stock basis and allow losses to be deductible on the 1040.

You're supposed to file a 966 as soon as it's decided to liquidate a corporation, but I'd bet most never bother.
https://www.irs.gov/forms-pubs/about-form-966

[jklcpa]

The Tax Advisor article "The importance of tracking AAA and E&P in transactions involving S corps"

https://www.thetaxadviser.com/issues/2017/aug/tracking-aaa-ep-transactions-involving-s-corps.html

[DANRVAN]

1 hour ago, jklcpa said:

tracking AAA and E&P in transactions involving S corps"

I agree with Abby Normal, AAA is moot.  OP did not mention E&P, that is a whole different animal.

[jklcpa]

57 minutes ago, DANRVAN said:

I agree with Abby Normal, AAA is moot.  OP did not mention E&P, that is a whole different animal.

I was responding to Abby's statement that he's "never" seen the purpose of AAA. I thought that was rather obvious since my post directly followed his and considering the title of the article itself.  It was meant as food for thought for all of the readership, so in future I will state something much more obvious to that effect and make sure to quote the person I am responding to so that everyone is clear on why I post something. I wasn't suggesting anything more than that.

Also, as to your comment about E&P not being a factor, well maybe and maybe not. I'll agree that it may be more likely than not, but you've been around long enough to have seen the many times posters here don't know what to ask and do not give all of the facts until badgered with questions from those more experienced asking for more information or clarification. You yourself suggested that this preparer may not have the experience needed for this engagement.

 

[DANRVAN]

Judy, your post and experience are greatly appreciated on this board.  I agree with you that if OP involves E&P he needs to dig much further, sorry my last reply was not clearer.

 

[JJStephens]

Thanks to all for your great insights. I've spent considerable time over the weekend digging deeper, reviewing the materials you suggested and numerous others. I discovered a few steps I wasn't previously aware of (including filing Form 966- thanks for the tip Abby). I also had an aha moment (more of a head-smack duh moment) about the losses that generated the negative AAA. Since they had already passed through to the sole owner via prior year K-1s, there was nothing further to do about them. I should have realized that sooner--I was making it a lot harder than it needed to be.

FWIW, there was no E&P involved.