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I am a shareholder in a sub S corporation. I was gifted more

I am a shareholder in...
I am a shareholder in a sub S corporation.
I was gifted more shares on July 1st and so need to determine net income for the first half year (tax owed by others).
The corp. uses the accrual method of accounting.
So, is income and expenses split for the year (based on when occurred) or averaged over the year?
What about capital gains - split or based on the date of the sale?
Thanks
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Answered in 8 minutes by:
8/25/2013
Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 7,211
Experience: Extensive Experience with Tax, Financial & Estate Issues
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Stephen G. :

Hi & thanks for using our service. I'll do my best to give you a complete & accurate answer. Please ask me to clarify anything that is not clear.

Stephen G. :

When S-Corp ownership changes during the year you have 2 options:

Stephen G. :

1. The S-Corp can elect to close the books at the date preceding the ownership change and that income or loss would be allocated to the shareholders as of that date.

Stephen G. :

OR

Stephen G. :

2. The income or loss for the entire year may be allocated pro-rata to the shares on a per share per day basis. If no election is made to close the books at the ownership change, this is the default method that must be used.

Stephen G. :

Capital gains are treated no differently than ordinary income for purposes of allocating the income among the shareholders.

Stephen G. :

Questions?

Customer:

Thanks Stephen.

Customer:

Stephen we are using option 2, so if I understand correctly, for tax purposes the entire years income must be determined before assigning net income to each shareholder (old and new) . Even though a building was sold in the first half year (subject to long term capitol gains), the gain will be split on a per share per day basis and not assigned to the first half owner.

Customer:

There are no other options correct?

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taxmanrog
taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 780
Experience: Licensed CPA, MA, MST with 31 years' experience. Teach Accounting and Tax courses at Masters level.
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Welcome to Just Answers! Thank you for giving me the opportunity to assist you! I will do my best to help!

 

As Stephen said, you can elect to close the books at the date of the change, then you each pay tax on the income that occurred when each of you owned the company. This is fairly easy to do, as even a basic paper-based accounting system is based on dates. So you can easily split the year and the income based on dates. If you don't split the year, then you have to allocate based on dates. Those are your only two choices.

 

I hope this clarifies Stephen's answer. Please make sure you rate him excellent as he gave you the proper answer.

 

Thanks! And have a great weekend!

 

Roger

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Sorry for the delay in responding, I was off enjoying the sunshine on a great Cape Cod day.

Thanks to Roger for clarifying my answer, but as he said, the choices I gave you are the only two options available, and yes, you can not determine the numbers for the shareholders' K-1s until the year has been completed.

I will say, that unless the ownership change occurs near the end of the year, we usually elect to use Option one & close the books the day before the ownership change. Further, when gifts are involved, we normally have our clients make those transfers on the first day of business in the New Year.

If you have any further questions, please let me know. If not, please remember to rate my response in order that I may receive credit for my work. I'll also leave you my contact information in case you want to reach me at some time in the future should you need some additional tax or financial advice.

If you need to contact me again with any tax or financial questions, you can just ask for "Steve G" at the beginning of your question. Again, please remember to rate my response. Bonuses, where you think they are warranted, and excellent ratings, are always most appreciated. Thanks again for using JustAnswer.com.You may get a short survey from the site; if it isn't too much trouble I would appreciate it if you would answer it; the survey results are used to rate our performance;
Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 7,211
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Customer reply replied 4 years ago

Thanks again.


My sister lives in Cataumet and your answer helps her also.


The challenge I face is that our Corporate accountant spent a good deal of time in June identifying the mid-year net income. His result was significantly higher than I would have expected (hence my research) based on last years net income. While income has improved, I don't think his number will prove accurate. Especially when prorated based on the full year results. We have too big a corporation and too many shareholders to close the books. I do have many other questions and will look forward to working with you in the future.

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Stephen G.
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