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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
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Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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What forms need to be filed in order to record any gain or

Resolved Question:

What forms need to be filed in order to record any gain or loss in the disposition of asset when an S corp is dissolved?
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Hi Chris,

S-Corp will provide shareholders with a statement regarding the property dispositions (per 1120S instructions on page 33-34) and the shareholder will use that information to complete Form 4797

For the K-1, Code K on line 17 is where it's referenced.




Remember, the S Corp doesn't report the gain/loss from these dispositions. The amounts will show up as M1/M2 adjustments as income/expense recorded in books but not on Sch K.



Make sense?

Lane

Customer: replied 1 year ago.

Not sure I see how there would be income & expense recorded in regard to the "disposition". I am preparing the 1120S, which I have done many of, but not in regard to corporate dissolution. Thank you.

Expert:  Lane replied 1 year ago.

On dissolution, you report on Report the gain or loss on Form 4797 with the corporation's tax return.

See this: http://www.irs.gov/instructions/i4797/ch01.html#d0e30

A dissolving S corporation is required to file form 966 with the IRS within 30 days of adopting a corporate resolution to dissolve and liquidate the S corporation.

Form 966 requires identifying information about the dissolving S corporation including name, address and incorporation date. Further, file the final income tax return on form 1120S for the S corporation within 3 months after the dissolution date.


The IRS requires the S corporation to file the final return by the 15th of the third month after dissolution.



Regarding the reporting itself ....

Fixed assets:

For fixed assets there is a capital gain for the corporation on the difference between the sale price and book value of assets.

Depreciation should be calculated up to the sale date. Hence, depreciation calculated for days in the year of sale that assets are owned by the S corporation is deductible on the final corporate tax return.

Again, report the gain or loss on Form 4797 with the corporation's tax return. The basis and sale proceeds of each asset sold must be separately tracked for reporting in the appropriate section of Form 4797

Now, as sale of a whole group of assets that comprise an entire business may require the seller and buyer to specify an amount directly allocated to the sold assets. This amount is reportable to the IRS on Form 8594, Asset Acquisition Statement.




For liquidation of Cash:

What you're really doing here is repurchasing stock from the shareholders; The corporation liquidates its final asset---cash---by paying shareholders to repurchase their shares of stock.

No tax deduction is allowed for any expense incurred by a corporation in connection with re-acquisition of stock. Also, any costs to complete the liquidation affect the gain or loss of the shareholders on their stock ... and are not, as I mentioned above, deducted as expenses on the corporation's tax return.



Shareholders ...

Shareholders report their gain or loss from owning the stock on Form 4797 on their INDIVIDUAL tax returns. If a corporation has made a special election under Section 1244, (they can make this any time up to the time of liquidation), they can deduct losses on their stock of up to $50,000 in that tax year.

Lane
Customer: replied 1 year ago.

Your reply is excellent....just one more fact to the situation. The sole shareholder is going to resume the exact same business, but in the form of a sole proprietorship. What is the gain or loss on assets in that situation - the book value versus fair market value at the date of the dissolution? What about debt? Does that enter into the overall gain or loss? There are payroll liabilities that have not been paid. I will gladly reward your reply with an appropriate tip as I understand this goes beyond a standard question.

Expert:  Lane replied 1 year ago.

What is the gain or loss on assets in that situation - the book value versus fair market value at the date of the dissolution?

Exactly the same, for the corp, difference between the sale price (FMV at dissolution) and book value of assets.


On the payroll (owed to the shareholder) sounds like you have a shareholder loan, so you have a deemed distribution of the asset to the shareholder, which of course shouldn't create distributions in excess of basis if he/she's always been the 100% shareholder.




Expert:  Lane replied 1 year ago.
Hi Christine,


I'm just following up with you to see how everything is going. Did my answer help?


Let me know if I've understood your question,
Lane
Customer: replied 1 year ago.

sorry for the delay in my reply. What if the assets are not sold, but used in the same business, but as a sole proprietorship? I asked this previously but I think it did not register somehow. In other words, the 100% shareholder dissolves his S corp; but then resumes the same activities under a sole proprietorship. No sale really. Is the gain or loss calculated on the FMV of the asset vs the book value? Is there a gain or loss to be calculated in that circumstance or do the "transferred" assets just have a zero basis to the sole proprietorship?

Expert:  Lane replied 1 year ago.

My first thought was that it's NOT the same business.

But actually, as both are pass-throughs, the asset's owner
s basis are the asset's owner's basis.

They're owned by the same entity... the individual.

(That's why C-Corp owners wish they had S-corps when they sell highly appreciated assets. For C-Corps, everything's just income, at the C-Corp's usually 35% tax rate, if they're making any money)

The s-corp owner is taking the gain at the personal level

Customer: replied 1 year ago.

OK, but is the gain or loss calculated as the difference between the FMV and the book value at the date of the dissolution ?

Expert:  Lane replied 1 year ago.


FMV and owners basis.





Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3730
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 2 other Tax Specialists are ready to help you
Expert:  Lane replied 1 year ago.

Thanks Christine.

Just researched a little more to verify and that's correct (FMV and owner's basis in the stock).

The shareholder consequences of a complete liquidation of an S corporation are governed by Secs. 331 and 1001.

Thanks for the feedback.

Lane
Customer: replied 1 year ago.

So, if there is zero basis in the S Corp stock; ;then if there is any FMV to the remaining assets, it would all be gain? Thank you for following up on this. Happy to make this a new query if you want because I will gladly send another tip your way.

Expert:  Lane replied 1 year ago.


That's right

Again, the tax consequences for the shareholder in a in a dissolution (complete liquidation)of S-corp are covered in by IRC 331(a).

(a) Distributions in complete liquidation treated as exchanges.--Amounts received by a shareholder in a distribution in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock.

26 U.S.C.A. § 331 (West)


The dividend rules that otherwise apply to corporate distributions are not applicable to distributions in complete liquidation.

Here, the dist. received by the shareholder are treated as payment for the exchange of stock. The shareholder's adjusted basis in the stock is subtracted from the cash and fair market value (FMV) of other property received from the corporation.

If the value exceeds your basis, it will be taxed as capital gain. If less, capital loss.


Positive feedback appreciated :)

Lane

Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3730
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 2 other Tax Specialists are ready to help you

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