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jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3159
Experience:  I've prepared all types of taxes since 1987.
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John, My business sold some real property (land/lot). Made

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John, My business sold some real property (land/lot).
Made $10500 net profit. I understand the 15% gains tax but not real sure how & where to enter this on my books. Also, are the funds available to be distributed without further tax to the shareholder (me) or would I wind up with double taxation if I distribute part of the funds to myself even after capital gains are paid on my k-1. Little confused on how this would work.
Submitted: 7 years ago.
Category: Tax
Expert:  jgordosea replied 7 years ago.

Presumably this is an S corporation. The shareholder of the S corporation must report the income that is computed on the K-1 regardless of whether there are, or are not, any distributions in that tax year. So, if the S corporation has 10,500 of capital gain and I am the sole shareholder then I will report that 10,500 capital gain on my indiviudal return to be netted with my other capital gains and then the individual's net capital gain will be subject to tax at 15%.

Distributions to the shareholder are a balance sheet item (equity) and do not influence the net profit of the corporation. To the extent that the shareholder has basis in the corporation there is no tax on this return to the shareholder of his investment (basis).

Only if the distributions exceed the basis of the shareholder and so represent a gain on what the shareholder had invested in the corporation would any of the distribution be subject to tax (also as a capital gain) to the extent that the distribution exceeds the shareholder's basis.

Please ask if clarification is needed.

Best regards.
Customer: replied 7 years ago.
I understand what you are saying on the k-1 part. I confused about what I credit and debit on the book side for starters ( WHERE IS THE NET GAIN ENTERED BESIDES SALES. Second, if I write myself a check for part of the proceeds, I'll take from cash and debit the equity account which would be tax free assuming I have enough shareholder basis. If I take more than my basis I would wind up paying 15% plus income tax ? Correct ?
Expert:  jgordosea replied 7 years ago.
Hello again,

"If I take more than my basis I would wind up paying 15% plus income tax ? Correct ?" Yes, that would net with your other capital gains and you will pay at capital gain rates on the net gain.

When you enter the sale of the asset you need to enter the proceeds against the asset and the remaining amount (the gain) should be recorded as "Other Income" Since the capital gain must be separately reported from the net profit it should appear on the income statement after, or below, the net profit.
Presumably you are not in the business of buying and selling land or this would be ordinary income and not capital gain. So, it would not be in the Sales income.

My journal entry for an asset sale will usually start with the sales price, less the basis and the remainder to the Other Income "gain on sale of assets" of a similar account. There often also needs to be entries for property tax or other current expenses paid by the seller.

I hope this helps to record the sale. Please ask if you need more help.

Best regards.
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