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RD
RD, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 8784
Experience:  CPA, MBA, Over 10 yrs of experience in tax planning and business consulting..
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1120S & Profits

Resolved Question:

In January 2007 I did a stock purchase of an S-Corp. I am making installment payments to the previous owner. I am an absantee owner and work very little for the corp therefore I only "earned" $12,000 last year from this corp. I also paid $16,000 in installment payments from the corporate account to the previous owner. It is my understanding that the $16,000 is not tax deductible, correct? So do I list this $16,000 on the 1120S or on any other form or does it just calculate as profits on the 1120S and pass through to my 1040 on the K1? Is my method for paying the previous owner the legal and correct way? Also, is there any way to lessen my tax liability on this amount?
Submitted: 6 years ago.
Category: Tax
Expert:  RD replied 6 years ago.

If you did a stock purchase, the installment payment would be at personal level. So you will make the payment from your personal account. Interest included in this payment will be considered investment interest expense. You can reduce the interest expense from the income that flows from the S Corp to your personal tax return. $16,000 paid from the corporate account will be reported as distribution to you or if you do not have enough basis that you can show it as a loan from the corporation to some extent.

 

Let me know if you have any question.

 

Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.

 

Customer: replied 6 years ago.

I purchased the corp for $100,000 so this would be my basis, correct? If I wanted to treat the $16,000 as a distribution, where exactly do I report this? Do distributions affect your basis?

Expert:  RD replied 6 years ago.

$100K is the cost of the stock. What about the retained earnings in the business and capital in the business?

Yes, $16K distribution will reduce your basis. But note that the gain will increase your basis in the corp too.

 

Let me know if you have any question.

 

Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.

 

Customer: replied 6 years ago.
Reply to RD's Post:

How do I report a distribution?

Expert:  RD replied 6 years ago.

It will be reported on Lin 16-Sch K-1 and on Sch M-2

Let me know if you have any question.

 

Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.

RD, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 8784
Experience: CPA, MBA, Over 10 yrs of experience in tax planning and business consulting..
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