Closing a 1-shareholder S-corp

[Rapid Robert]

TheTaxBook has a small section on corporate liquidations, and I once filed a final return for an essentially inactive C corp a number of years ago, but I'm still looking for any hints or tips on my current client's scenario.

One point I'm especially curious about -- the owner has always taken payroll, whether or not it was "reasonable compensation" I can't say. However, they did not take regular distributions, so there is going to be about $100K of cash distribution when the bank accounts are closed. Is this likely to attract an IRS inquiry? How far back can they go to possibly claim that this should be re-classified as wages?

The S-corp has been in existence for about 15 years, sole shareholder, no employees, no tangible assets. Maybe it should never have been an S-corp since I don't think net profit before owner compensation ever exceeded $100K and was often much less, but that's in the past.

The taxpayer does not want to continue the business as a sole proprietor, and is not selling any goodwill.

There will be a short year tax return filed for 2023. We're choosing a tentative end date of Aug. 31 (taxpayer is out of town for a while before that). I also know about Form 966 requirement.

I told them to make sure no more payroll is processed for the owner, and that final Form 941 is filed. Curious what is best way to handle the 2023 FUTA return (Form 940) not due until Jan 2024?

Told them to make sure no more income is received or bills paid after the close date.

There is a SEP-IRA - unlike qualified plans, I believe no separate IRS filing is required, probably it should just be rolled over to a Trad. IRA.

Bank checking and savings accounts and credit card should be closed.

Does the EIN need to be canceled? (or is such a thing even possible?)

The California Secretary of State paperwork needs to be filed withing 12 months of closing.

Anything else?

[Uncle Sam]

Your initial statement says it's a C Corp - then you describe S corp issues. Which is it? I assume that it's S corp.
If S corp, distributions have already been taxed as ordinary income and shareholder is only distributing what was already taxed, unless there's C corp E & P that was
never distributed.
While I'm NOT from CA, nor do I know about CA employer tax laws, I would expect that you'd need to notify the CA withholding tax unit and SUI unit of final year reportings.
In your preparation of Form 966, I suggest you prepare formalized corporate minutes and attach them to Form 966, as well as prepare dissolution forms to the Dep't of State.
Upon filing Form 966, and noting "Final Return" on last S Corp returns, that would terminate the EI#. If CA is like NY, DOS won't give clearance to close corporation until it
receives an approval certificate from income tax department. I would make sure that as of last payroll paid, FUI deposits are paid to cover all FUI liability for year, but check
on whether or not IRS would accept a pre-filing of 2023 FUI form prior to 2023 forms being printed.

[Rapid Robert]

Thank you for the reply.

"Your initial statement says it's a C Corp"

No, I indicated it was an S-corp in the title and in the body. I only mentioned a C corp as my one and only prior experience with closing a corp.

"distributions have already been taxed as ordinary income and shareholder is only distributing what was already taxed"

I know that. My concern is that in the final year, the owner will have very little wage compensation, and a large amount of distributions, because they never distributed much money in prior years (despite my advice to do so). Isn't that something the IRS looks for in wage reclassification audits? I guess it doesn't matter, because there isn't really any other way to handle it that I know of, but just wondering if we should expect anything from IRS down the road.

[Uncle Sam]

I would doubt it if the AAA was growing over the years from not taking distributions and there was a continuous showing of salaries.