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RD
RD, Certified Public Accountant (CPA)
Category: Tax
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Experience:  CPA, MBA, Over 10 yrs of experience in tax planning and business consulting..
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I had written before about a buyout for an S corp. Here is ...

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I had written before about a buyout for an S corp. Here is the story. There were 3 partners, each had 100 share of stock. One shareholder had a stroke and can no longer be involved with the company. There was an agreement drawn up by an Attorney which stated for the sum of $250,000 the 100 shares from the disabled partner will revert back to the company. This $250000 will be paid in the form of goods and services, like consultant fees, health, life and other insurance. This agreement started in 2006 and will go through 2008. The corp has been deducting these as expenses to the corp and has 1099's the shareholder all along for these services. Do I just adjust the shares when the payments are completed, or is there a capital gain component I should be recording here for the appreciation of stock and if so how would I record it if the payments have been expensed through the corp all along. When can I revert the shared back to the company.

If the Corporation is taking benefit by deduction the expenses that it is paying to the shareholder than this will not be considered as payoff to the shareholder.

The Corporation should pay $250K as buyout price for the 100 shares and record these as Treasury Stock (which will be a reduction in the equity account) and a due to stockholder. So journal entry will be

Treasury Stock Dr $250K

Due to Stockholder(outgoing) Cr $250K.

Any amount that the Corp pays should reduce the stockholder's loan account and not be reported as payment for fees and services. Fees paid for health, life and other insurance can, however, reduce the loan account. In fact by paying Form 1099 income the corporation is having the shareholder pay tax on something that it has actually not earned.

THe stockholder (on his taxes) will report this as sale of stock for $250K and reduce his basis in the stock to determine his gain or loss.

 

Let me know if you have any question.

 

Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.

 

Customer: replied 9 years ago.
Reply to RD's Post: I understand, we have already filed the returns for 2006 with the expense, I assume I would need to amend, which would really open up a can of worms.....If the shareholders can agree, can they change the agreement to make the buyout just the book value of the stock, which is pretty much 0 for the retained earnings are negative????

If they all agree to change the agreement than they may do so.

However, if the business has built some goodwill than I would suggest that the buyout be carried out at fair market value. Maybe the S Corp should buyout the share for the amount that has not yet been paid and reported as service payments as payment towards purchase of stock and not claim it as an expense.

 

Let me know if you have any question.

 

Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.

 

 

 

 

Customer: replied 9 years ago.
Reply to RD's Post: I just thought the same thing, there is still a year on the buyout, so can we change the agreement to the amount left, I will book the Treasury stock for that amount the loan, as payments are made, we will adjust the loan account until it hits 0. Then in 2008, I will re assign the stock to the 2 remaining shareholders. Is that correct??

You do not have to assign the stocks to the remaining shareholders. These stocks will remain the the corporation and can be reissued to some other stockholder joining into the corporation.

If you want, the corp can give these as stockdividend and hence you can transfer it to the 2 remaining shareholders. But, you do not have to do so.

Earlier the stockholders were 100, 100, 100 share owners .....do the sharing was 1/3rd

now they will have 100, 100 shares ....so they will be 1/2 owners.

If you assign 50 shares to each of them-

they will have 150, 150 shares....so in essence they will be 1/2 owners only...

So does not make a difference whether you assign the shares or hold it as treasury stock in the S Corp.

 

Let me know if you have any question.

 

Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.

Customer: replied 9 years ago.
I will go ahead in 2008 and book the Treasury stock for the remaining monies due and a loan. The end of 2008 the remaining shareholder will be 50/50 no one is joinging the group. On the final k1 for the shareholder I would report the buy out where.

You will report the closing shareholder % share as 0....you will report the distribtion to him on K-1 on Line 16.

 

Let me know if you have any question.

 

Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.

Customer: replied 9 years ago.
One last clarification.

I will report the treasury stock in 2008 for the remaining amount due, assuming the shareholders agree.

I will book the loan receiavable for the amount and adjust when payments are made.

At year end, assuming all has been paid off, I will book the amount on the k1, line 16, no gain/loss will be recording on the books of the company.

Yes

You will report loan payable and not loan receivable.

yes. you will report the purchase, distribution on K-1 and no gain/loss will be recorded in the books of the company.

 

Let me know if you have any question.

 

Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.

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