Please be nice. Just looking for some guidance.
Client owned 150 shares in an S-Corp. (He was a 3% shareholder)
The S-Corp purchased his shares in 2021 for $65,000
Basis $186,000 ($35,000 buy in, balance undistributed income)
Received "deferred compensation" of $120,000 in 2021 on Form W2 for his share of uncollected receivables.
This can't be as simple as $120,000 in ordinary income and a $121,000 capital loss limited to $3,000. Tax disaster.
He did not use an attorney or ask me about the arrangement.
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Bob,
THANK YOU!
Wow, my client meets the requirements of Section 1244. Went from owing $6,000 to a refund of $26,000.
In the process of researching and reporting it, I found nothing in the IRS publications. Proseries has the reporting option buried and I do feel it should be a prompt under the "sale or complete disposition" sheet.
My client will be thrilled. As cynical as people can be about the IRS, I did have a feeling that the outcome I had come up with was inequitable and the intent of Congress was not to have a 40 years capital loss carryover ($3,000 per year) for undistributed ordinary income received, taxed and added to his basis.
Thank you and God Bless. I hope you enjoyed France and Spain. I am heading to Paris and London in October and hoping the CDC drops the testing. I am reading about people flying to Canada and driving across the border to avoid the requirement.
Everyone here is always "nice" 😁 Like @IRonMaN said need more details. I don't quite understand your " Received "deferred compensation" of $120,000 in 2021 on Form W2 for his share of uncollected receivables." S Corps are pass through entities, and do not issue W2's
My client was part of a large medical practice. He owned 3% of the shares. He was ready to retire and the S-Corp purchased the shares back from him.
Thank you in advance for any advice that you can offer.
Hi Terry,
Yes S-Corporations do issue W2s all the time. Matter of fact, they are required to pay reasonable compensation to the shareholders. This client was a 3% shareholder in a large medical practice and was ready to retire. The S-Corporation purchased his shares back for $65,000. The $120,000 paid over six months was coded on his W2 as deferred compensation and was in addition to his regular compensation through 04/30/21 (the date of the stock redemption). He also received a K-1 for the year for his share of profits through 04/30/21.
Thank you in advance for any insight on the matter.
Sorry I was interrupted, and didn't get to finish my reply. Of course S Corps issue W2's, but only for shareholders services. Deferred comp is only something I have seen C Corps issue to high paid executives as a form of nonqualified retirement
Those who accuse me of not playing nice at times, will be disappointed that I passed my Covid test Saturday at the Paris pharmacy across the street from the Airbnb, and after 24 hours and two flights yesterday I am trying to remember some of what I managed to forget about taxes the last couple weeks in Spain and France. I have a client who sold S corporation stock back to the company -- but at a profit. I was wondering if Section 1244 applied, but that's only for losses. Might help your client, though. Another client sold a medical practice, where insurance reimbursements often take six months or more to be paid after services are delivered. I wouldn't call a settlement of these amounts "deferred compensation," but I would agree with putting it on a W-2 and telling the former owner/shareholder, "this is what you earned before you retired, we're just paying it to you now in anticipation of what we know will be collected later."
Bob,
THANK YOU!
Wow, my client meets the requirements of Section 1244. Went from owing $6,000 to a refund of $26,000.
In the process of researching and reporting it, I found nothing in the IRS publications. Proseries has the reporting option buried and I do feel it should be a prompt under the "sale or complete disposition" sheet.
My client will be thrilled. As cynical as people can be about the IRS, I did have a feeling that the outcome I had come up with was inequitable and the intent of Congress was not to have a 40 years capital loss carryover ($3,000 per year) for undistributed ordinary income received, taxed and added to his basis.
Thank you and God Bless. I hope you enjoyed France and Spain. I am heading to Paris and London in October and hoping the CDC drops the testing. I am reading about people flying to Canada and driving across the border to avoid the requirement.
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