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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 11142
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I have a customer who sold their shares of an S corporation

Customer Question

I have a customer who sold their shares of an S corporation (LLC with election 2553 to be treated as an S corporation) -how to record this sale on her personal income tax
JA: The Accountant will know how to help. Please tell me more, so we can help you best.
Customer: Corporation issued the final K! to the shareholder
JA: Is there anything else important you think the Accountant should know?
Customer: we have determined basis is this reported on 4797 as capital gain?
Submitted: 5 months ago.
Category: Tax
Expert:  Lane replied 5 months ago.

Hi. My name's Lane. I can help here.

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Yes, you've answered your own question here. :0)

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Sale of shares in an S-Corp (treated as an S-Corp for tax purposes) IS taxed just as if this were C-Corp stock.

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It's a capital gain. (4797, schedule D)

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The final k-1 DOES represent his/her allocation of income loss and/or other items and should be filed as before.

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Do be sure that the K-1 was marked "final," or the taxing authorities will be looking for another in the following year.

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Please let me know if you have any questions at all, before rating me.

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And if you DON'T have other questions Your positive rating … (by using those the stars or faces on your screen, and then clicking “submit”) …would be appreciated!

Otherwise I receive no compensation for the work.

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Thank you,

Lane

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I hold a law degree, with concentration in Tax Law, Estate law & Corporate law, a Master’s Degree, with specialization in financial accounting & tax, a BBA, and CFP & CRPS designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, since 1986

Customer: replied 5 months ago.
This is actually an LLC electing to be treated as an S corporation - so the disposition would be the same as you explained?
Expert:  Lane replied 5 months ago.

Yes, that's why I put the parenthetical "treated as an S-Corp for tax purposes," in there.

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Both LLC's and regular corps electing through 2553 are, for stock sale purposes, treated as a capital transaction.

Customer: replied 5 months ago.
for basis purposes - do I have to take the basis since they converted fro LLC to S corp or the basis since it was originally organized as LLC?
Expert:  Lane replied 5 months ago.

Basis since originally organized. Each partner's basis (or if a single member LLC the basis in the assets) at the point in time that the S-Corp election is effective IS (becomes) the beginning basis for the S-Corp.

Expert:  Lane replied 5 months ago.

Technically, there is a contribution of basis to the S-Corp then the s-Corp is (technically) exchanging all of it's assets (and liabilities) to the corporation in exchange for the corporations stock. ... THEN the stock is distributed to the owners BUT the deemed transfer is tax free, (Sec. 351(a) applies) if the LLC’s liabilities do not exceed the basis of its assets.

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(Regs. Sec.(###) ###-####3(g)(1))

( Regs. Sec 351(a))

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The LLC can then elect S status, assuming that its members are eligible to hold S corporation stock (Regs. Secs. 1.1361-1(c) and(###) ###-####3)

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Bot***** *****ne, the LLC is contributing it's basis TO the S-Corp on day 1