Assets sale of professional practice operating as an S-Crop (installment sale)

[jwagner]

Hello Group,

I have a professional practice operating as an S-Corp.   Client sold the practice in an assets sale with $20,000 allocated to Equipment and $380,000 to Goodwill.  There was $50,000 cash down at closing and two separate installment obligations receivable.  $50,000 due annually over 3 year (starting after 1 year) contingent on the sellers employment to assist in the transition, and a $300,000 Promissory Note calling for monthly payments over 10 years with 3% interest calculated.  Both installment obligations indicate  that the payments can be made directly to sole shareholder rather that the S-Corp. 

Client wishes to liquidate the entity and receive future payment personally.  In my head, I want to reflect the appropriate installment gain form the 50,000 down payment, and distribute the installment obligations to the shareholder in liquidation of the entity, with the intent that payments received under these obligation personally should be reported as installment sales at the personal level (one for fixed assets and one for goodwill).

I am struggling on how to get this properly reflected on the tax return and the K-1.

Thanks for any help you could provide.

Joe Wagner 

[George4Tacks]

Installment sale is elective. Failure to satisfy a payment agreement is common. The client tells you what to do, after you have offered your expert opinion to them. 

Is your struggle solved by just doing a bulk sale and including IRS 8594? or is the struggle in convincing the client to keep the s-corp.

I would create a copy of the return and then doing an outright sale. Let the client see how much the reporting of the whole sale will impact the client. Advise the client of the tax treatment if the agreement later fails.

Best of luck!

[jwagner]

Thank for your thoughts...  It makes sense to use the installment method because this is consistent with the cash received from the buyer.  The is not the issues.  The objective is to avoid paying tax up front, when the proceeds will be received over time.  The question is how to report the distribution of the installment obligation on the K-1 when there is a complete liquidation?

Thank you,

Joe

[George4Tacks]

This where Google can be helpful. Here are a few I found

https://www.thetaxadviser.com/issues/2014/sep/tax-clinic-06.html

https://www.esapllc.com/disposition-of-installment-obligations-where-income-reported-under-installme...

Here is the search I used https://letmegooglethat.com/?q=installment+sale+on+s+corp+with+distribution+of+notes+payable

[jwagner]

I believe the solution is pretty much this but Lacerte does not provide much functionality to do this. 

When a liquidating distribution consists of an installment obligation subject to installment sale reporting, the reporting process becomes more complex. Here's how you would typically handle it:

• Schedule K-1: Prepare Schedule K-1 for each shareholder, as usual. Report the liquidating distribution in Box 16, using Code D to signify that it's a non-dividend distribution. Additionally, provide the necessary information regarding the installment obligation in the supplemental information section or attached statements.
• Form 1120-S: On Form 1120-S, report the liquidating distribution as you would for any other distribution in Part II, Line 17. However, because it involves an installment obligation, additional reporting is necessary.
• Form 6252: Prepare Form 6252, Installment Sale Income, to report the installment sale. This form is used to report income from sales where the seller receives payments over more than one tax year. Provide details of the installment obligation, including the principal amount, interest, and any other relevant information. This information is typically derived from the terms of the installment agreement.
• Attach Supporting Documentation: Along with Form 1120-S, attach any supporting documentation related to the installment obligation. This may include copies of the installment agreement, schedules detailing the payments, and calculations of gain or loss.
• Shareholder Reporting: Shareholders will receive information on the liquidating distribution and installment obligation on their Schedule K-1. They will need to report the installment sale income on their individual tax returns using Form 6252, if applicable.