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Hello RD:May I request your...
Hello RD:May I request your contact number so that we can discuss one on one.I have an IT company (S corp) and planning to sale 100% stocks.
Should I distribute my retained earning to shareholders before actual sale occurs?Vipin
Submitted: 5 months ago.Category: Finance
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Answered in 10 hours by:
11/26/2017
Financial Professional: Lane, JD, CFP, MBA, CRPS replied 5 months ago
Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 14,026
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Hi. My name's Lane

...

LANE - I hold a law degree (J.D.), with concentration in Tax Law, Estate law & Corporate law, an MBA in finance, a BBA, and CFP & CRPS (Chartered Retirement Plans Specialist) designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice 1986.

If you’ll please bear with me for a minute I’ll type up my initial response, and then we can go from there if you have further questions on this

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Financial Professional: Lane, JD, CFP, MBA, CRPS replied 5 months ago

NO. As a passthrough, (because that profit flowed through the K-1 to the schedule E to line 17 of your tax return) you have already been taxed on those dollars and should pull/distribute before sale.

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This will not be a taxable event.

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It WILL, however, decrease your basis in the S-Corp stock.

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Financial Professional: Lane, JD, CFP, MBA, CRPS replied 5 months ago

S-Corp shareholders track their basis (a yearly calculation) for two reasons; (1) knowing basis available to take losses, and (2) to be able, eventually, to calculate capital gain on sale, if a stock sale is done.

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Capital contribution and profit raise basis, losses and distributions decrease basis.

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If a purchase is made and retained earnings are left in the company, this should be added TO the purchase price.

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The convention is not to include cash (which again, would already have been taxed) in the sale.

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Financial Professional: Lane, JD, CFP, MBA, CRPS replied 5 months ago

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

If this has helped, and you DON’T have other questions … I'd appreciate a positive rating, using the stars on your screen, and then clicking “submit" – That’s the only way I’ll be credited for the work.

I hope you’ll rate me based on my accuracy and thoroughness (as opposed to any good news/bad news content). Thank you!

...

But again, if you need more on this, please let me know.

Lane

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Financial Professional: Lane, JD, CFP, MBA, CRPS replied 5 months ago

Hello - Did you see my answer? Id be glad to make thr offer for a phone consult. This comes at an additional charge. Let me know.

...

Lane

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Customer reply replied 5 months ago
I am confused from your first response. Are you telling us to distribute or not?FYI, I keep my books on accrual basis and file tax return on cash basis. Thus, retained earning on K-1 are different than what I see on my accrual balance sheet.
Financial Professional: Lane, JD, CFP, MBA, CRPS replied 5 months ago

I'm telling you that you SHOULD if you want the money. Most do. You've already paid tax on it.

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VERY rarely would someone sell an S-Corp with the cash accounts in tact. You'd certainly want to add that to the purchase price ... and THEN you'd be increasing your gain on sale with money that's already been taxed.

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(effecively taxing yourself twice)

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Lane, JD, CFP, MBA, CRPS
Category: Finance
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