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My niece owns 50% in an S-corp that has losses just about…

Pearl, my niece owns...

Pearl, my niece owns 50% in an S-corp that has losses just about every year and cumulatively significant. These losses were effectively funded by borrowing money. The loan is six figures. Now the other 50% shareholder wants to keep the company and have the company exercise a stock redemption for the 50% of the company my niece owns for $100. The amount my niece effectively paid for her shares. . My question is would my niece have to pay taxes on the difference of her $100 and the 50% of negative retained earnings? Hopefully my question is clear. Thanks.

Accountant's Assistant: The Accountant will know how to help. Is there anything else important you think the Accountant should know?

My niece did not personally guaranty the loan the corporations took out to fund operations. She was an employee of the company and received a salary that was effectively shielded from taxes by virtue of the k-1 losses allocated to her each year.

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Answered in 21 minutes by:
3/8/2018
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 33,142
Experience: Taxes, Immigration, Labor Relations
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When your niece sells her shares in S-corporation -

she will simply report the sale transaction on form 8949 as

$100 (sale price) MINUS (adjusted basis)

Her basis in S-corporation share is her original contribution - that was $100

Then - the basis is adjusted every year based on K1 reporting

see worksheet in instructions

https://www.irs.gov/pub/irs-pdf/i1120ssk.pdf

page 4

Worksheet for Figuring a Shareholder’s Stock and Debt Basis

.But her stock basis will never be less than a zero

Thus - we will calculate her gain or loss - and it will not be more than her original $100.

Losses that S-corporation realized and all corporate debts will NOT affect your niece as a shareholder.

Let me know if you need any clarification or help with reporting.

Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 33,142
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