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USTaxAdvising
USTaxAdvising, CPA
Category: Tax
Satisfied Customers: 1084
Experience:  US Taxation specialist.
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we closed our S-Corp in 2012 and we are filing our final K1.

Resolved Question:

we closed our S-Corp in 2012 and we are filing our final K1. One of our investors is looking for a final K1 from us even though his ownership became 0% as of 2010. Without a final K1 he feels his losses from investment can not be claimed in his return. Since he ceased to be a shareholder since Aug 2010, how do we get him a final K1 showing his losses? How do we fulfill his request? thanks
Submitted: 1 year ago.
Category: Tax
Expert:  USTaxAdvising replied 1 year ago.

Hello,

Thank you for using justanswer. I can assist you with your questions today.

 

If he ceased to be a shareholder in 2010 and 2010 was his final year of allocation of income/losses then his 2010 Schedule K1 should have been marked as final at the top of the K1 (there is a little box to check). I think the most accurate remedy would be to amend the 2010 Schedule K1 and mark the K1 as final. (Don't forget to mark the box on the K1 as amended as well) You will need to send in the amended K1 with an amended 1120S form. (see page 6 here - http://www.irs.gov/pub/irs-pdf/i1120s.pdf)

 

If the investor is willing to accept a 2012 Schedule K1 being marked as final that would work as well. It just won't provide the investor with the correct year of disposition of his investment.

 

The investor needs the K1 marked as final because it provides proof that he disposed of his investment.

 

Please let me know if you have any further questions.

 

Best regards,

Customer: replied 1 year ago.
To your response "If the investor is willing to accept a 2012 Schedule K1 being marked as final that would work as well. It just won't provide the investor with the correct year of disposition of his investment." ,

Is it legally ok to provide an investor with 2012 Schedule K1 marked as Final even though he ceased to be an investor as of 2010? Please note that we have closed the S-corp in 2012 so this has to be final K1 for all of us.
Expert:  USTaxAdvising replied 1 year ago.
Is it legally ok to provide an investor with 2012 Schedule K1 marked as Final even though he ceased to be an investor as of 2010? - No it is not legally Ok from an income tax/IRS standpoint, I should not have mentioned the 2012 remedy. (some folks would do it just to free themselves of the administrative burden of filing an amended 1120S).
Customer: replied 1 year ago.
I am still confused. It will probably help you give me clarity if i gave you some specifics here. The investor invested 100k into the S-Corp in 2009 and purchased 'x' number of shares. In August 2010, the company refunded 60k to the investor (based on mutual agreement) and the investor signed a rescission and release agreement through which the investor surrendered all the shares.

Now that the S-Corp is closed, the investor wants a Final K1 which shows the loss of 40K of his investment. Here is my dilemma:

1. When i use the TaxAct software to provide a Final K1 for the investor, it does not allow me to give a K1 for the investor because he was not a shareholder in 2012. perhaps, One option as you indicate is to amend his 2010 K1 and also call it "final k1"?

2. Even if we try to prepare a final K1 manually for the investor, which line numbers in Federal K1 do we indicate in the investor's K1 his 40k loss against his original investment of 100k?

thanks in advance. I will sigh a big relief with some clarity.
Expert:  USTaxAdvising replied 1 year ago.

1. When i use the TaxAct software to provide a Final K1 for the investor, it does not allow me to give a K1 for the investor because he was not a shareholder in 2012. perhaps, One option as you indicate is to amend his 2010 K1 and also call it "final k1"? - If he was no longer a shareholder in 2010 then the 2010 K1 should have been marked as final. You can file an amended 2010 K1 for to rectify this oversight.

 

2. Even if we try to prepare a final K1 manually for the investor, which line numbers in Federal K1 do we indicate in the investor's K1 his 40k loss against his original investment of 100k? - You do not show his 40K loss. That is his basis tracking responsibility. He put in 100K and you returned 60K and closed out his shares. The company is not required to disclose the 40K loss to the investor, it is the investor's loss, not the company's.

 

Make sense?

 

best,

Customer: replied 1 year ago.
Thanks. Yes it makes sense. The investor happens to be a friend. How does he claim his 40k loss in his return since our amended k1 will not help him there?
He feels our company owes an equivalent of 1099 for him to claim the loss in his return since our scorp is closed.
Thanks again
Expert:  USTaxAdvising replied 1 year ago.

He claims the loss as a short term capital loss on schedule D. He bought stock for 100K and only received 60K back (+/- any allocation of income/losses) thus the 40K is a capital loss for him.

USTaxAdvising, CPA
Category: Tax
Satisfied Customers: 1084
Experience: US Taxation specialist.
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