Change from S-Corp to Sole Proprietorship

[RayT]

Client incorporated in 2013 (S-Corp) and has had no income and has initiated depreciation on about $3,000 in assets (no Sect 179), together with expenses has created losses in both years (2013/2014). Client wants to dissolve corporation as of 12/31/2014, making the 2014 return final. Client continues use of all assets in business as a sole proprietor. I believe this is a non-taxable event. Can someone briefly (if possible) explain the process for reporting on the 2014 final return?

[Bees Knees]

Liquidating a corporation, including an S corporation is a taxable event. The shareholder is treated as selling his stock in exchange for the fair market value of all the assets. The corporation is treated as selling all of its assets to the shareholder at fair market value. Thus, you have gain or loss first at the S corp level, which is passed through to the shareholder on the K-1. Then you have the shareholder reporting gain or loss on his Schedule D for the sale of the S corp stock.

If you don't know how to do this, I would suggest you get TheTaxBook Small Business Edition and study page 27-4, Sale of a Business. There is an S corporation example in that Tab Section complete with filled in tax forms so you can see where everything goes.

[kathyc2]

What you need to keep in mind is that a corporation is a legal and separate entity. Even though the client "wants" to disregard the corp as of 12.31.14, if he conducted any business as a corporation in 2015, you can't really back-date the termination. It would be better to chose any future date in 2015 to terminate the corp and then file a short year return for 2015.

You should probably advise client that after he is no longer a corp he can't present himself as being one. In short, Inc. can't appear on invoices, checks, business cards etc. He will also need a new EIN and probably reapply for any state reporting.

As far as the assets, I agree w/ Bee with a small difference. Assets should be "sold" to shareholder at higher of FMV or basis. Since this is a related party transaction, loss is not allowed.