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I need to find out if there's a way to report actual

I need to find out...
I need to find out if there's a way to report actual earnings of each of two officers in a sub S corporation on their K-1s (they operated separate businesses with separate dba's) rather than income based on ownership percentage. One of the owners was an officer for part of the year, the other was an officer the entire year. I can explain in more detail in a moment.
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Customer reply replied 1 month ago
This question is actually about my own accounting business which is set up as an S corp. My husband was also an officer of the corporation, and we set up “Josh Mayfield PA-C” as a dba because he works as an independent contractor for a hospital, so I kept the books for both of our companies under one corp, with each of us a 50% owner. However, we divorced last year, so I set up a new corporation for him, and he was removed as an officer from my corporation mid-year. Our divorce was final before year end, so we’ll be filing separate tax returns this year. My question is: is there a way to report actual earnings for each of us on K-1s for the corporation that we were both officers of until mid-year? I kept track of the separate income and expenses for both of our businesses, so I know how much should be allocated to each of us (me ~ $39k, him ~$63k), but it seems my only option is to indicate when he left the corporation, which would give me something like 71% ownership and him 29%, which makes my K-1 income higher than it actually was, and his lower than it actually was.
Answered in 36 minutes by:
3/8/2018
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 14,020
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Actually IRS has issue regs on how to deals with the issue of a shareholder leaving mid-year.

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In regulations under Internal Revenue Code Sec. 1368, the IRS has determined that if there is more than a 20% change of ownership in the corporation during a year, the corporation may elect, by consent of all of its shareholders, to allocate income on an actual closing of the books basis as of the date the change of ownership hits 20% during any taxable year.

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So this allows you to allocate his final k-1 based on time AND ownership (his 50% for the time he was 50% owner)

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However, this (checking the final k-1 box) is only allowed if his ownership is 0% at the end of the year.

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The issue this raises is that there needs to be a gift or a sale... some sort of transaction that gets him out of the S-Corp as an owner.

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Listen, Terri, I have to go pick up my daughter but will be back on in less than an hour and we can go from there ... hope that's OK

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Customer reply replied 1 month ago
No worries, I'm in the same boat actually (need to go pick up my daughter!)... I can respond later tonight or tomorrow and we can resume then. I'm not in a big rush on this. Thanks!

Ok, back ... but the bot***** *****ne here is that S-Corp shareholders are owners and there needs to be a buyout either by the S-COrp or another shareholder. This allows you to give him a final K-1 that is essentially proportionate to the time he was an owner (factored, of course, by his ownership percentage for that time).

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There was a time when checking the final K-1 box was allowed only to reflect the termination of the parent S Corp, not the individual shareholder interest. That's not the case anymore. The common practice today is (once the buyout is executed ... either by you buying him out or the S-Corp redeeming the shares and holding as treasury stock, the S Corp issues the departing shareholder his last K-1 and submit a copy of that form to the IRS, marking the box for Final K-1.

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The K-1 should cover the shareholder’s portion of the business’s financial activity for the period, starting at the beginning of the business’s tax year to the day he sold his shares.

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Customer reply replied 1 month ago
Okay. So what does the IRS actually need to see/what do we need to do in terms of paperwork for me to buy him out as of 12/31/17? (I checked; we haven't done anything to officially remove him as an officer of the corp). Or is it as simple as just checking "final K-1" on his K-1? We have an amicable relationship; in fact, I still do his accounting for him. So we will come to an agreement on our own to rectify the fact that I'll be paying income tax on income that was actually his that he kept, since it sounds like there's no way around splitting our combined income under the corporation 50/50, since we were each 50/50 officers of the corp.

A simple shareholder agreement between the two of you (and would only be needed in the event of an audit).

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And no, officers (a function) and ownership, are two different issues. You should keep a stock ledger that defines who owns the stock.

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A shareholder agreement for you to buy him out for $1 then then changing the stock ledger with that date (OR again, having the S-Corp buy him out (called a stock redemption) in this case you'd show the shares as treasury stock in the stock ledger, will do it.

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This then allows you to give him a final k-1 that reports activity allocated to him until that date, without terminating the business.

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See this: https://www.allbusiness.com/asset/2015/02/7.1-Stock-Ledger-and-Capitalization-Summary.pdf

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 14,020
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Customer reply replied 1 month ago
That answers my question, thank you! I'm sure you'll hear from me again the next time I have a tax question. It sure beats making an appointment with a CPA, going in and paying several hundred dollars. I'll leave you great feedback. Thanks, Lane!

Glad to help. Thanks for thinking of me.

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Lane
Lane
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Category: Tax
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Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986

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