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Wallstreet Esq.
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I have a CALIFORNIA business client who sold s business (Sub

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I have a CALIFORNIA business client who sold his business (Sub S) corporation as of 10/1/2015. I filed a FINAL tax return for them for period 01/01/2015 to 09/30/2015. I believe that the NEW owners would need to file a SHORT YEAR tax return for period 10/01/2015 to 12/31/2015 using the same tax ID number. Am I right?
Submitted: 8 months ago.
Category: Tax
Expert:  Tyrone J. Taylor replied 8 months ago.

HelloCustomer

I am an Enrolled Agent and I've prepared taxes and provided tax representation for the last 9 years.

The fiscal year of the company did not change with the ownership of the company. This was only a change in ownership of the shares. So, the tax year should remain the same.

When preparing the 1120-S, you should be able to show on the K-1 you prepare the allocation of income based on who owned the shares during a given points during the tax year.

Customer: replied 8 months ago.
but the new owners must file a short year tax returns from 10/01/2015 to 12/31/2015 since they took over the business. The former owners filed a final tax returns from 01/01/2015 to 09/30/2015 since they are no longer responsible for months after 09/30/2015 right?
Expert:  Tyrone J. Taylor replied 8 months ago.

I am going to provide you with reference information shortly.

Expert:  Tyrone J. Taylor replied 8 months ago.

Hello again,

Please refer to the Instructions for the 1120-S page 22. It describes an Election that must be taken to divide the tax year into two due to termination of a shareholder's interest.

http://www.irs.gov/pub/irs-pdf/i1120s.pdf

So to clarify, selling an S-Corp does not result into two individual tax returns - one for before the sale and one for after it. The income and expenses are allocated based on the amount of shares owned and the time period the share were owned within the same tax return. This is not the final 1120-S return for the sellers, nor the initial tax return for the purchasers of the company. An S-Corp is a distinct separate business entity from its owners.

Customer: replied 8 months ago.
but the business was sold and the sellers (who filed 01/01/2015 through 09/30/2015 does NOT have an idea what the BUYERS reported as income for period 10/01/2015 going forward; I talked to Franchise Tax Board in California and was told to have the new owners/buyers file a short year tax return 10/01/2015 to 12/31/2015
Expert:  Tyrone J. Taylor replied 8 months ago.
Customer

Not sure what to tell you other than I have checked with several sources and filing two separate 1120s in the same tax years is not the correct method of filing this return. The California FTB does not file 1120s. And whomever you spoke to gave you an incorrect answer.

I'm sorry I can not be more helpful. Good luck with finding a definitive answer to your question.

Customer: replied 8 months ago.
I think what I need to do is AMEND the tax returns to show the tax returns as NOT FINAL; SELLER files 01/01/2015 through 09/30/2015 and the BUYERS file 10/01/2015 through 12/31/2015. Thanks you are a good man Tyrone..
Customer: replied 8 months ago.
I do value your opinion. I have been doing taxes too for over 35 years and formerly worked for Deloitte & Touche and KPMG.
Customer: replied 8 months ago.
just need a sounding board LOL.. Many thanks again and have a great Easter weekend..
Expert:  Tyrone J. Taylor replied 8 months ago.

Hello Romulus,

I have consulted directly with two of the top Enrolled Agents in the country, and they both state that the way the tax return was filed is incorrect.

One question. Did they sell the assets of the company, or did they sell the stock? If they sold the assets, then a new company could be formed. If the sold the stock, then their needs to be one tax return. There are two methods in regards ***** ***** this tax return. "Per share, per day" or "Closing the books" http://www.law.cornell.edu/cfr/text/26/1.1377-1
http://www.thetaxadviser.com/issues/2008/dec/allocatingpassthroughitemstoscorporationshareholders.html

Expert:  Tyrone J. Taylor replied 8 months ago.

I appreciate your acknowledgement that I am trying to provide the best information I can. Ultimately, it is your choice and your decision to make, and I respect that. Good luck and I definitely hope it works out the best for you and your client. Have a great Easter weekend yourself.

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