I have a situation where there were 2 stockholders, 1 holding 75% the other holding 25%. The 25% stockholder bought out the 75% stockholder all cash buyout on an agreed price. He nows own 100% of the 1120S corp. My thinking is I need to close books as of buyout day, and continue on with the one stockholder. Question is books are kept on accrual basis and there were a lot of accounts receivable to which bad debt were usually written off at end of year, how do I handle these? your thoughts on this and doing a closing of books on buyout day. Many thanks.
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Pass-through items form the S-corp are allocated to shareholders on a per share/per day basis.
It's a fairly simple calculation you do at year-end to adjust the annual results for the K-1's.
The corp can choose to allocate based on two short years under certain circumstances. I've never done it this way because it's more complicated, but your clients may have a reason to choose this treatment.
You can get more detail on pages 19-7 and following in TTB."The only function of economic forecasting is to make astrology look respectful" - John Kenneth Galbraith -
Look at form 1377 and instructions. Yes, more complicated but it does allow a better allocation of efforts by shareholders. I did one in 2010. Worked out fine for remaining shareholders. Several papers to get signed by all shareholders.This post is for discussion purposes only and should be verified with other sources before actual use.
Many times I post additional info on the post, Click on "message board" for updated content.Comment
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From a non tax point of view, i.e. GAAP, books always need to be closed out, so that ending balance sheet will reflect book value on last day previously stockholder owned even one share of stock.
Also important is determining just how the present stockholder "bought out" the other one. Did he purchase the stock?
Or did corporation redeem the stock? Were the stock certificates transferred/cancelled properly?ChEAr$,
Harlan Lunsford, EA n LAComment
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Stock holder borrowed money from bank and bought out the other. Certificates cancelled and reissued. If done on per day basis then I will have to allocate depreciation based upon same theory?Originally posted by ChEAr$ View PostComment
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I've never had need to allocate based on stockholder days, but if I remember right, you add up all stockholder days, and that number is the denominator. Then the all year stockholder uses 365/6 days as his numberator in order to pro rate his share of ordinary income. This example supposes a 50/50 stock split before exit.
If split were 75/25 before, you would have to factor this in determining the denominator.
Might bring back fond memories of that cost accounting course, eh what? grinChEAr$,
Harlan Lunsford, EA n LAComment
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