SCorp

[nypreparer]

Two member LLC is being taxed as an S Corp. They sold the business, including the EIN and name. The previous owners will receive K1s marked as final without and income allocated to them because the sale happened in the beginning of the year and the new owners just get added as K1 recipients, correct? The depreciation stays the same and the new owners who personally borrowed money get to deduct the interest expense but not add anything to the depreciation schedule since everything (building, equipment, etc) is already being depreciated? The sellers could be paying capital gains depending on the value and their cost basis.

[kathyc2]

Sounds like that bought the shares, not the assets if the EIN remains the same. The interest on money they borrowed to buy shares is not an expense of the S, but may be deductible on 1040 via 4952. The amount new owners paid, does not show on corporate books.

[Uncle Sam]

I agree - the shares of stock were sold, not the individual assets. You will need to contact each of the taxing authorities of the ownership changes as well as insurance policies. They each should have a designated form to furnish that information.

[nypreparer]

Wouldn't the attorney have contacted the taxing authorities as part of the sale/closing? Also, the seller would be subject to long term capital gains on the increase in the value of their shares that they sold from when they first started the business, correct? I'm taking the original owner's basis from the value at the time of the sale minus any transaction costs.

[Uncle Sam]

It is not normally the attorney's responsibility to deal with tax matters, but if he/she did, a copy of it should have been provided to the client or you as the accountant.

You are only partially correct on basis. There may be "outside" basis issues to deal with.

[RAG1775]

I believe the interest expense of the buyer is most likely deductible on Sch E reflected on a separate line. There are some nuances that should be reviewed in the regulations under 163 dealing with excepted and non excepted trades or businesses. But in general, take a look at IRS Notice 89-35.
Also see IRS Notice 88-37 for reporting.