S Corp partial change in ownership mid-year

[MarvinE]

S Corp has 3 members and one drops out mid-year and lets the corp buy his interest.  He and the others expect he will have S-corp income for the first 5 months and none for the remainder of the year.  I can only find accounting for the entire year but nothing on part year owners.   What can I do?

[PhoebeRoberts]

The split-year election requires all affected shareholders to agree in writing to split the year. In the absence of that election, he gets per-share-per-day. To effect the election, you figure out separately what each K-1 will look like, then override all the K-1s to match that. The one I did took two Lacerte files, 4 times as long as the return would have taken using per-share-per-day, and a ton of tedious swapping pages. Also, the return had to be paper filed.

[MarvinE]

I can understand the concept of the per-day calculation but where in Lacerte is that data entered?

[PhoebeRoberts]

You just override the K-1s so that they have the appropriate income split. 

[PhoebeRoberts]

What I do is use Excel to calculate Screen 7 input that forces most of the K-1s to be as correct as possible, if possible. Then you use Excel to calculate what the K-1s should look like and override in Screen 33.

[MarvinE]

OK, I get the hang of overriding the K-1s which I can do.  Will we definitely need an agreement by all shareholders for the changes?   If so, is there a form to use or do we just create a page with the applicable data on it?  And is there a requirement that a change in such ownerhip be mailed in rather than e-filed?  Before we finalize this, I want to tell you a big THANKS for giving me direction when I was lost.

[PhoebeRoberts · Accepted solution]

The corporation needs all the shareholders to agree in writing; often it's covered in the purchase agreement. Nothing goes with the tax returns, though. If they haven't yet agreed in writing, "We hereby agree to split income for ABC Inc using the specific accounting method specified in IRC Sec. 1377(a)(2)) for the tax year ending 12/31/2019" is sufficient. They need not all sign on the same piece of paper.

If you can override the K-1s to be correct in one Lacerte file, the return can be e-filed. Some stuff, like disposition of Sec 179 assets and QBI, is difficult or impossible to override to correct, so you need to stick together the return out of pages from multiple Lacerte files. In that case, paper filing it is!

When you're doing the cutoff, watch out for weird timing things that properly fall in one period or another, like fully refundable deposits received by a cash-basis taxpayer for work to be performed in the future. (Taxable to the period of receipt, alas!) You have more than typical liability for this return. If you prepare any of the shareholders' personal returns, you should also get conflict of interest waivers from everyone involved, because figuring out who gets how much income creates an actual (not just potential) conflict of interest.