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PDtax
PDtax, CPA firm owner
Category: Tax
Satisfied Customers: 2033
Experience:  32 years tax experience, including four years at a Big 4 firm.
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I am a tax preparer and I have a client that is looking to

Resolved Question:

I am a tax preparer and I have a client that is looking to liquidate their C Corp and close the business. There is a large loss being shown this year and we'd like not to lose that. What are your thoughts on doing a late S-Corp election before filing the last return so that the losses from the corp flow to the tax payer?
Submitted: 11 months ago.
Category: Tax
Expert:  PDtax replied 11 months ago.

PDtax :

Welcome to the site. I'm PDtax, and will be helping you today.

PDtax :

good morning. I like the idea. If you can qualify for the late election relief, this could work.

Customer:

hello

PDtax :

S elections are normally due within 75 days of a year start (March 15th or so) for it to be effective for that tax year.

Customer:

the IRS has released a revenue ruling this year that greatly liberalized late s corp election. i dont see any issues. this corp is an 11/30 fiscal year end. so if we elect now, then file the 966 once we receive the 2553 approval?

Customer:

seems like it would work. also, the single shareholder owes about 20k to company as a 'due'. any thoughts on this?

PDtax :

I am aware of Rev Proc 2013-30. Let's assume you qualify for relief. Have you considered basis for shareholder; that is, can the losses be used by shareholder 2013?

PDtax :

Let's assume you qualify, and that your shareholder has basis. If shareholder owes the corp, that is often rolled in to determine gain/loss on liquidation so that the gain gets capital gain treatment (as opposed to ordinary debt forgiveness income).

Customer:

from what i see on books and prior return, she had investment of110k to open. no liab. losses of about 60k in 3 years. basis to me looks about 40k. this sound right. current year loss is only 10k.

Customer:

yea so we can consider the due from shareholder as part of the closing entry on books and calculate liquidation capital gain/loss as such?

PDtax :

Isn't basis still 110K if this was a c corp?

PDtax :

yes

Customer:

oh thats right, basis is still 110k. so she could see a considerable capital loss here as well?

PDtax :

yes

PDtax :

so converting to S will allow for passthrough of ordinary loss now, and capital loss for the remainder of investment.

Customer:

so basis will not change in the s corp election, the losses just basically affect netbassets when they are distributed. i'm thinking in a few fully depreciated vehicles it would make sense to firsr distribute at fmv to shareholder and then shareholder can sell those?

PDtax :

there may be tax gain if depreciated. Just sell (avoids sales tax on transfers) as s corp. Gain goes to shareholder anyway.

Customer:

there's some opportunities to avoid sales tax in a corporate liquidation in MA. just curious, to make sure i'm covering all bases here. if she was to distribute property to herself, her gain would be calculated on FMV of assets, correct? not on basis in assets.

Customer:

that's the last question. thank you in advance, this has been a huge help.

PDtax :

taxable gain to corp on distribution. shareholder gets assets at fmv, and sells for no personal tax gain.

PDtax :

If that covers things, positive feedback closes out your question. Thanks from Just Answer. I'm PDtax.

Customer:

oh ok, i see, so the gain will flow to her either way.

Customer:

huge help! i am giving you an excellent rating. thank you very much and have a great day.

PDtax, CPA firm owner
Category: Tax
Satisfied Customers: 2033
Experience: 32 years tax experience, including four years at a Big 4 firm.
PDtax and 6 other Tax Specialists are ready to help you

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