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When S-Corp ownership changes during the year you have 2 options:
1. The S-Corp can elect to close the books at the date preceding the ownership change and that income or loss would be allocated to the shareholders as of that date.
2. The income or loss for the entire year may be allocated pro-rata to the shares on a per share per day basis. If no election is made to close the books at the ownership change, this is the default method that must be used.
Capital gains are treated no differently than ordinary income for purposes of allocating the income among the shareholders.
Stephen we are using option 2, so if I understand correctly, for tax purposes the entire years income must be determined before assigning net income to each shareholder (old and new) . Even though a building was sold in the first half year (subject to long term capitol gains), the gain will be split on a per share per day basis and not assigned to the first half owner.
There are no other options correct?
Welcome to Just Answers! Thank you for giving me the opportunity to assist you! I will do my best to help!
As Stephen said, you can elect to close the books at the date of the change, then you each pay tax on the income that occurred when each of you owned the company. This is fairly easy to do, as even a basic paper-based accounting system is based on dates. So you can easily split the year and the income based on dates. If you don't split the year, then you have to allocate based on dates. Those are your only two choices.
I hope this clarifies Stephen's answer. Please make sure you rate him excellent as he gave you the proper answer.
Thanks! And have a great weekend!
My sister lives in Cataumet and your answer helps her also.
The challenge I face is that our Corporate accountant spent a good deal of time in June identifying the mid-year net income. His result was significantly higher than I would have expected (hence my research) based on last years net income. While income has improved, I don't think his number will prove accurate. Especially when prorated based on the full year results. We have too big a corporation and too many shareholders to close the books. I do have many other questions and will look forward to working with you in the future.