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    #1

    Exiting Shareholder- Basis Adjustment

    I have a client who is an 1120S and have two shareholders father and son and owned the company 50/50. They company did small contracting work.
    Due to some personal disagreement son decided to leave father's business as of January 1st 2021. Son took distributions up to 12/31/2020 and simply walked away from the business and removed his name from the the business as an officer by contacting Secretary of State. The 1120S for 2021 is on extension and I was just informed a couple weeks ago of the existing shareholder. Father will still continue to be in business for next few years. The S-Corp does not have any buyout written agreement.

    My question is that son took no withdrawals and paid no wages to himself from the business in 2021 but has basis in the amount of $12,000 as of 1/1/2021. I understand I'll be filing a final K1 for the son but I'm not sure what happens to his basis of $12,000. I have shown father owning 50% at the beginning of the year and 100% ownership at the end of the year and I have also changed son's share 50% at the beginning of the year and 0% at the end of the year. Any guidance how to get rid of his basis and other tax reporting I should be aware of will be highly appreciated as I don't do too many 1120S is in the year.
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    #2
    Being a shareholder and being an officer are different things. Relinquishing an officer position does not mean that he is not a still a shareholder. He still has basis and still gets a K-1 (not marked final). UNLESS he relinquishes he shares formally.
    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

      #3
      see TTB 19-9 - “S Corporation Shareholder’s Basis”
      Always cite your source for support to defend your opinion

      Comment

        #4
        Thanks for the TTB reference, I already read that but I am still unclear on who to handle this.
        Secondly, this 1120S had two shareholders (father and son) and same two individuals were also listed as officers with the Secretary of State.

        Comment

          #5
          WHY are all of you ignoring the relationship between an officer and a shareholder? An Officer doesn't have to be a shareholder. A Shareholder doesn't have to be an Officer. Giving up a title as an Officer means nothing in regards to status of a shareholder.

          I strongly suggest that Dad write up a letter dated back to 12/31/20 that the Son can sign giving up all his shares. Possibly paying the Son the $12,000 for the signature. Failure to get signature may cause the loss of S Corp status due to unequal distributions.

          Research provided by other refer to partnerships which have nothing to do with S Corps.
          Last edited by BOB W; 05-19-2022, 12:58 PM.
          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

            #6
            Originally posted by BOB W View Post
            WHY are all of you ignoring the relationship between an officer and a shareholder? An Officer doesn't have to be a shareholder. A Shareholder doesn't to be an Officer. Giving up a title as an Officer means nothing in regards to status of a shareholder.

            I strongly suggest that Dad write up a letter dated back to 12/31/20 that the Son can sign giving up all his shares. Possibly paying the Son the $12,000 for the signature. Failure to get signature may cause the loss of S Corp status due to unequal distributions.

            Research provided by other refer to partnerships which have nothing to do with S Corps.
            Agree with your last sentence.

            So here is a reference to S Corp:

            https://smallbusiness.chron.com/remo...orp-24906.html

            reference to Shareholder basis:

            https://www.irs.gov/businesses/small...and-debt-basis
            Last edited by TAXNJ; 05-19-2022, 12:45 PM.
            Always cite your source for support to defend your opinion

            Comment

              #7
              TAXNJ: your links are good, but Sami needs to understand the overall procedure of closing the books on Son's share. Refer to my previous post.
              TIME IS OF THE ESSENCE.
              Last edited by BOB W; 05-19-2022, 01:02 PM.
              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

                #8
                WHAT IS IT THAT YOU DON'T UNDERSTAND??????? Besides being outlandish!
                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

                  #9
                  Post #5 from Bob W makes sense to me, for whatever that's worth.
                  "You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe Howard

                  Comment

                    #10
                    Originally posted by BOB W View Post
                    WHAT IS IT THAT YOU DON'T UNDERSTAND??????? Besides being outlandish!
                    What is this reply post about for this poster’s scenario?

                    You gave a good suggestion for the original poster to consider or comment.

                    Now others give their reply posts and if the original poster has more questions then let the poster post it.

                    No one is being outlandish and hopefully you understand.
                    Always cite your source for support to defend your opinion

                    Comment

                      #11
                      I think the original poster wanted something simple without getting beat up and having complications thrown in. In absence of other possible circumstances (many of which have arisen in other posts hitherthence), I'll try my best. (I've been beat up so many times I am immune to it. I might be everyone's whipping boy.)

                      If son took NO DISTRIBUTION, then the $12,000 basis is gone with the reporting of a capital loss - zero proceeds, basis of $12,000. End of story.
                      However, if he was liable for any loans, his share of the loans would have to be included in the distribution.

                      Assume he took no money out, but he was 50% liable on $30,000 in loans. His real "distribution" would be $15,000 and he would report a $3000 capital gain.

                      I'm also wondering about the calculation of his basis, as it cannot include loan guarantees for a Sub S (unlike a partnership).
                      Last edited by Beersheba; 05-22-2022, 01:21 AM.

                      Comment

                        #12
                        Beersheba, liked your answer (KISS). Instead of trying to tell client what to do, just report what took place. Son left took no distribution, had basis, capital loss

                        Comment

                          #13
                          There is nothing simple about this transaction. Properly closing the books on shareholder is very important for the continuation of the S Corp status.
                          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

                            #14
                            The circumstances may not be simple, but they may not introduce as many complications as have been alluded to in this thread.

                            And certainly I'm not the brightest bulb in the room, but if you read down the responses, who else most nearly answered the question posed by the original post?

                            Comment

                              #15
                              The original poster asked questions that do not apply to his problem. Stock certificates need to be sign over to Dad. I would further create a liability account to Son for the $12,000.
                              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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