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Megan C
Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 16538
Experience:  Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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Clinet has two S-Corps...both with big losses and negative

Resolved Question:

Clinet has two S-Corps...both with big losses and negative equity. One S-Corp is 100% owned by client....other has 24% minority shareholder. This minority shareholder put no money in at the start and has no basis in the stock becuase of all the losses. Client wants this shareholder to give up his ownership in this S-Corp and be added as 24% owner in the second S-Corp instead. Can this happen as a non-taxable event?
Submitted: 2 years ago.
Category: Finance
Expert:  Megan C replied 2 years ago.

Megan C :

Thank you for your question. My name is XXXXX XXXXX I would like to help you today

Megan C :

Unfortunately, if this is just the minority shareholder swapping one stock for another, this would not be a tax free reorganization.

Customer:

that's what I thought. what are the tax implications?

Megan C :

The minority shareholder would recognize gain or loss on the disposal of the original S Corp stock

Megan C :

It would be gain since they have no basis

Customer:

he has a negative basis from all the losses. How would gain be calculated?

Megan C :

Well, their consideration is the value of the new stock they are receiving

Megan C :

So their gain would be equal to the value of the stock in the second company

Customer:

if it was 80% would it be a tax free exchange?

Megan C :

Yes, because it could be a reorganization

Customer:

so the value of the stock in the new business would be figured by FMV of corp? Would he be able to offset the gain by the carryforward of losses?

Megan C :

Yes, the carryforward losses would offset if the losses can be used

Customer:

would his basis from the old increase because of the exchange so he could offsetthe losses?

Megan C :

Well, his basis in the new corp would increase by the gain recognized from this swap


 

Customer:

so he would have zero basis in the old and the carryforward losses just disappear?

Megan C :

That would be correct, because he will never get basis in the old to use up with the losses

Customer:

got it thanks

Megan C :

You're welcome

Megan C :

Is there anything else I can help you with?

Megan C :

If I have helped you with your issue, please rate my response positively so that I may receive credit for assisting you today

Customer:

That will do it. Thanks Megan!

Megan C :

You're welcome

Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 16538
Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
Megan C and 2 other Finance Specialists are ready to help you
Customer: replied 2 years ago.


I need some more help....


 


I forgot to ask how the transfer works. With zero basis in the old and 60,000 FMV of new stock....he has a 60,000 gain....with 60,000 in basis. What happens if their is 100,000 in losses? Does that offset the gain becuase of the 60,000 in basis?

Expert:  Megan C replied 2 years ago.
Thank you for your follow up. Yes, if there are losses they will be offset by the gain because of basis in the stock.

Please let me know if you need anything additional

Megan
Customer: replied 2 years ago.


so 60,000 in capital gain and then 60,000 in ordinary loss...since he has active participation and is at risk. Then the 40,000 carries over?

Expert:  Megan C replied 2 years ago.
Yes, the $40,000 will carry over as remaining basis, so if there are losses in the following year he can take them.

Thanks

Megan
Customer: replied 2 years ago.


but with 60,000 gain he would only have 60,000 in basis? Then 40,000 of the loss will carry forward until he has more basis?

Expert:  Megan C replied 2 years ago.
I'm sorry, I was thinking the other way around. The $40,000 of loss would stand until there was $40,000 of basis to take. Sorry for the confusion.

Megan

Please rate positively so that I may receive credit for further assisting you today. Thanks.
Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 16538
Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
Megan C and 2 other Finance Specialists are ready to help you