Level 7

Question

How do I report no income but distributions for a 1120S shareholder's final K-1?

Forum|Forum|4 years ago
September 9, 2021
3 replies
21 views

Two shareholders of several S Corps parted ways in 2020. There are 3 S Corps - my client was left with one of the S Corps and the other shareholder was left with the other two S Corps. Both were 50% owners of each entity.

Of course I didn't find out about this until after the fact. The attorney drew up the transfer/sale of stock between the shareholders with an effective date of January 1, 2020. All parties agree that no profit will be allocated to the departing shareholder in 2020 - all agree that the true transfer date is midnight December 31, 2019. My thinking is that if the agreement is effective January 1, 2020 then there should be one day of profit allocated to the departing shareholder. Even the attorney agrees that the intent is no profit allocation in 2020.

The departing shareholder for the entity that I am preparing the tax return received a distribution in the first quarter of 2020, which is not proportionate to her ownership interest.

My client received a K-1 from the two entities that he has transferred his shares. The K-1 show zero income and reports distributions.

When preparing the 1120S for my client, PS only allows me to enter 1/1/20 as the final date for the departing shareholder. PS then allocates one day of profit to this shareholder.

How do I get PS to report the K-1 with zero income and a distribution to the departing SH? Of course this will create a problem between the parties if the K-1s aren't reported in the same manner.

Also, for my client, I am thinking that whatever final distribution he received would be considered payment for his shares in the other entities and the difference between his basis and the amount he received will be reported as a loss from sale. Is this correct?

Thanks for your help.

ProSeries Professional

This topic has been closed for replies.

sjrcpa

Level 15

They are making a cut off the books election. At 12:01 AM on January 1 it would be reasonable to assume there is no year to date profit or loss.

In Lacerte we have to override the K-1 numbers when the election is made. Not sure how you do it in ProSeries.

The more I know the more I don’t know.

dkh

Level 15

ProSeries will require an override of K-1 numbers

D

david3Author

Level 7

Thank you.

When I override the numbers then will I still be able to e-file the return? It seems as though whenever I try to override anything then I get e-file errors.

Do I simply uncheck the box to check for e-file errors and then the tax return will be e-file accepted?

Thanks.

sjrcpa

Level 15

You may need to attach a Section 1377(a)(2) election statement, too.

The more I know the more I don’t know.

qbteachmt

Level 15

Are you describing that the leaving shareholder (in each entity) who was no longer a shareholder also got a distribution, as if they are being bought out of their own entity with their own basis?

Don't yell at us; we're volunteers

D

david3Author

Level 7

I'll have to make sure but it appears that is what they are doing. Unless, the distributions were already made before the transfer/sale agreement was prepared and signed. Remember, the agreement was prepared after the first quarter and backdated for the effective date of the transfer/sale.

I'm thinking the latter is the case but I will double check.

D

david3Author

Level 7

Each departing SH transferred their stock to the remaining SH. A distribution was made to my client from the entity he departed. No distributions were made from the other 2 entities to the other SH since those entities incurred losses and there were no funds available to pay distributions.

Sign up

Login with SSO

Let's get you signed in

Login with SSO