TDPhan
Level 1
12-06-2019
08:23 PM
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I have a S Corp client with two shareholders. The business started on 01/01/2018. In March one of the shareholder became severely ill and withdrew entirely 100% of his investment. They dissolved their S Corp on 03/31/2018. The other shareholder accepted all net operating loss in 2018. How can we handle their Schedule K-1? Can I prepare only one Schedule K-1 for the shareholder with NOL?
Thank you.
Tao Phan
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TaxGuyBill
Level 15
12-06-2019
08:23 PM
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Um, one shareholder can't just "accept" the loss. The loss is divided between them based on their ownership (with two K-1s).
If the corporation was dissolved and completely ended in March 2018, do you realize the tax return is now quite late (with penalties)?
TDPhan
Level 1
12-06-2019
08:23 PM
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Thank you so much. But what about the first one who was severely ill, and withdrew his entirely 100% of his investment before dissolution (assumed each invested $100,000 and first one withdrew his $100,00 and the S Corp lost $10,000) ? I just try to help my client a proper and lawful way in compliance with tax law and rule. I never had this situation before. Thank again.
taxiowa
Level 9
12-06-2019
08:23 PM
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The one who withdrew would have a short term capital gain of $5K. Assuming they had all losses before he withdrew as stock owner. His basis would go down by the share of loss $5K. But he received his initial equity back in full.
TDPhan
Level 1
12-06-2019
08:23 PM
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Clearly got it. Thank you so much.
rbynaker
Level 14
12-06-2019
08:23 PM
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I'm not sure the timing of the income/loss is relevant (but this isn't exactly in my wheelhouse). Take a look at IRC 1377:
https://www.law.cornell.edu/uscode/text/26/1377
And regulations:
https://www.law.cornell.edu/cfr/text/26/1.1377-1
Basically the income/loss gets allocated pro rata per share per day so you'll get a different answer if the $100K withdrawal was on 3/1 vs. 3/30.
I think really this hinges on your use of the term "withdrew". I assume this means "exchanged shares for cash" and not just "took a cash distribution" but follow the legal paperwork to arrive at your tax position.
Rick
https://www.law.cornell.edu/uscode/text/26/1377
And regulations:
https://www.law.cornell.edu/cfr/text/26/1.1377-1
Basically the income/loss gets allocated pro rata per share per day so you'll get a different answer if the $100K withdrawal was on 3/1 vs. 3/30.
I think really this hinges on your use of the term "withdrew". I assume this means "exchanged shares for cash" and not just "took a cash distribution" but follow the legal paperwork to arrive at your tax position.
Rick
