S Corp short year help

[mhcpa1964]

Hello all. Hope you're doing well.

Client is a S corp owned by 3 brothers. Two sold out to the surviving 1 on 4/30/2019. Survivor continued business as usual with respect to QB financial statements along with EIN. I'm clear on how to handle the financial statements. My questions concern some technical issues on how to manage the 1120Ss.

1) If I tell the tax software the actual short year date of 4/30/19, won't the IRS eventually send a love letter imposing a late filing fee? How do you manage that?

2) Surviving entity remains a S corp. I'll do a 1120S for the remainder of the year. Since he continued on by using the existing EIN there will be 2 1120S returns for 2019 on the same EIN. Will that cause a problem?

I'm sure there's more I need to know. Any comments, advice or tips is greatly appreciated.

Thanks all.

[spanel]

There is no short year with the Scorp. You only have a change of owners during the year. You will handle this on the 2020 1120S on the K1 info.

Chris

[TAXNJ]

Hope you are doing well also

Reference TTB 19-8 if applicable (see below):

Election to allocate based on two short years. The S corporation may elect to allocate items as if the tax year consisted of two taxable years if the following requirements are met.

• A shareholder terminates his or her entire interest during the year, or

• A qualifying disposition took place.

Termination of shareholder’s entire interest. If a shareholder’s entire interest is terminated during the year, the shareholders may elect to allocate income as if the corporation’s taxable year consisted of two taxable years, with the first year ending on the day the interest was terminated. All affected shareholders must agree, including the shareholder whose interest was terminated. Once made, the election is irrevocable and is effective only for the terminating event for which it is made.

To make the election, the corporation must attach a statement to a timely filed original or amended Form 1120-S for the tax year for which the election is made. The corporation must state that it is electing under IRC section 1377(a)(2) and Regulation section 1.1377-1(b) to treat the tax year as if it consisted of two separate tax years. The statement must also explain how the shareholder’s entire interest was terminated (e.g., sale or gift), and state that the corporation and each affected shareholder consents to the election. A single statement may be filed for all terminating elections made for the tax year. Also write “Section 1377(a)(2) Election Made” at the top of each affected shareholder’s Schedule K-1.

Qualifying disposition. A qualifying disposition is:

• A disposition by a shareholder of 20% or more of the outstanding stock of the corporation in one or more transactions during any 30-day period during the corporation’s taxable year,

• A redemption of 20% or more of the outstanding stock of the corporation from a shareholder in one or more transactions during any 30-day period during the corporation’s taxable year, or

• An issuance of an amount of stock equal to or greater than 25% of the previously outstanding stock to one or more new shareholders during any 30-day period during the corporation’s taxable year. [Reg. §1.1368-1(g)]

[mhcpa1964]

Thanks you two. Indeed I read both 1377 & 1368 and I learned so much. I'm so grateful for this forum and the FICPA. Seems I forgot the basics of corporate stock lol. Thought I was supposed to do something similar to partnership interest sale.

TAXNT - I understood the following. If the disposition is a qualifying disposition as listed above and in 1.1368-1(g)(2)(i) then we can't elect the two separate tax year option because of 1.1377-1(b)(1). Here's the pertinent section from 1.1377-1.

(b) Election to terminate year -

(1) In general. If a shareholder's entire interest in an S corporation is terminated during the S corporation's taxable year and the corporation and all affected shareholders agree, the S corporation may elect under section 1377(a)(2) and this paragraph (b) (terminating election) to apply paragraph (a) of this section to the affected shareholders as if the corporation's taxable year consisted of two separate taxable years, the first of which ends at the close of the day on which the shareholder's entire interest in the S corporation is terminated. If the event resulting in the termination of the shareholder's entire interest also constitutes a qualifying disposition as described in § 1.1368-1(g)(2)(i), the election under § 1.1368-1(g)(2) cannot be made.

The sellers each owned 33.3%. According to 1.1368-1(g)(2) we can't use two separate tax years but have to use the year to date figures. Sellers benefit from lower OI in this case.

Would you agree with my assessment?

[mhcpa1964]

Never mind my last comment. Didn't realize that pertained to termination which isn't the case.