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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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I have a company s corp one owner 60% the other 40% in 2014

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I have a company s corp one owner 60% the other 40% in 2014 the accountant took out the partner of 40% and the shares were sold for 170,000. but now they have to start paying out the agreement of the 170K and in 2014 the account left the k1 in -65K. Now i dont know how to make the equity balance , i know we have a promissory note for 170K but i understand he sold the shares at a loss.

The main question is WHO purchased shares?

If shares were purchased by the remaining shareholder - that purchase transaction would not be on S-corporation books.

But if S-corporation purchased its own shares - these become Treasury stock in an S corporation.

​That purchase is NOT coming from the shareholder's capital account.

    Customer: replied 1 year ago.

    The corporation is an s corp and the owner of the s corp with the 60 but the 40 from the other owner under the s corp.

    The question is WHO purchased shares from the departed shareholder?

    The remaining shareholder? or the S-corporation itself?

    Customer: replied 1 year ago.

    the corporation itself the owner did not give the other shareholder money from the personal account.

    When the S Corporation purchases a shareholder's stock, this transaction does not affect the other shareholders' basis .

    Purchased shares become an asset of S-corporation and should be lusted as asset on the balance sheet.

    For the departed shareholder - at the time of departure the capital account should be zeroed and closed.

    Customer: replied 1 year ago.

    I have to create an investment 170K which i need to create the liability for the promissory note of 170K. When I write the check for 35K for the next five years to pay the investment , i am going to reduce the liability by 35k , what do i do with the investment account dont i need to reduce it as well.

    the other accouuntant never logged this transaction in ???

    You are correct.

    That would be just an ordinary installment sale.
    Be sure that a part of the payment is allocated to interest income - and that will be deductible for the corporation and taxable for the payee.

    Otherwise principal payments are capital investments and should not be deducted as business expenses.

    So - when S-corporation will use earnings for these payments - these earnings will be taxable for the remaining shareholder - while may not be distributed because of that installment obligation.

    Customer: replied 1 year ago.

    the 35k it has to be regestered as a loss i am missing a leg in one of the entries and it cannot be an equity account.

    Just to refresh our discussion...
    The question is WHO purchased shares from the departed shareholder?
    Customer - the corporation itself the owner did not give the other shareholder money from the personal account.
    .

    So - the corporation just purchased shares. If happens to be shares of the same corporation.

    I do NOT see any loss realized in that transaction.
    If the corporation later SELL shares for less than it purchased them - then we will have a loss.

    So far - that is a capital invested and NO loss.

    Lev and other Tax Specialists are ready to help you