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R. Klein, EA
R. Klein, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 3375
Experience:  Over 20 Years experience
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In mid 2012, I made an agreement with my business partner that

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In mid 2012, I made an agreement with my business partner that is as follows:

- I sold my claim/intellectual property from my half of our business (a North Carolina S Corp) for 50% share of net operating income year-to-date. This totaled $14k.
- In addition, we agreed that I would receive an extra premium $11k.
- We would retain our 50/50 shares for tax purposes and he would then dissolve the business and move it to his home state of CA.

I do my taxes via Turbotax, and entered my Schedule K1 from the business (which had a short tax year since it was closed in mid-2012). This schedule K1 is very simple. It has $24k in box 1 for Ordinary business income and then the amount of my half of the net operating income (the $14k) in box 16, "Items affecting shareholder basis" (it is also marked with D) in that box. This is the Form 1120S Schedule K1.

My question is, since this number is XXXXX on my K1, do I have to report is elsewhere, or does the K1 cover it? When I entered my K1 into TurboTax, it increased the taxes I owe, so I'm wondering if I report the $14k that I received if I am reporting it twice.

(Also, I just reported my $11k as "Misc Income", would this be correct?)

Thanks!

Randalltax :

Thank you for contacting me about your Tax issue. I will work hard to help you understand the issue clearly.

Randalltax :

There should be one K-1 on the 1120S for each shareholder showing his share of the income of the corporation. If 24K is your share and it appears in YOUR K-1 in Box 1, this is your income from operations.

Randalltax :

This income will appear on Page 2 of Schedule E only.

Randalltax :

Additionally, when you liquidate the corporation, you must show a sale of your shares of the S-Corp on Schedule D.

Randalltax :

Your "sale" price is the value of all of the money and assets your received at liquidation. You must determine your cost basis to determine if there was any gain or loss.

Randalltax :

You have an "outside" basis of what you put into the company originally to get your shares. This is "adjusted" by your inside basis.

Randalltax :

Your inside basis is the earnings of your corporation minus any distributions over time.

Randalltax :

In other words, if you start by contributing 1000 cash, that's your outside basis.

Randalltax :

If you company, over time, made $3000, and paid out $3200 as distributions, then your inside basis is now 3000-3200, or -200. Your total basis is the 1000 original plus the negative 200, for an adjusted basis of 800.

Randalltax :

If you received 1000 at the close of the corporation, your schedule D shows 1000 sale price - 800 basis for a 200 gain.

Customer:

Ah okay - I see what you are saying. Our company used to be an LLC and I don't believe any cash was put in for our outside basis.

Customer:

Does it matter that I received the $14k distribution from the agreement prior to the liquidation of the S-Corp? Or would the IRS see that as my gain from the liquidation of the business?

Randalltax :

The distribution affects inside basis.

Randalltax :

Your distributions are counted from Day One of the corporation.

Randalltax :

It doesn't matter if distributions are paid every day, once a year, or only at the closing of the entity.

R. Klein, EA and other Tax Specialists are ready to help you