S Corp Shareholder

[S T]

Can someone lend a hand for accounting entries.

New S Corp formed, was a prior Schedule C sole proprietor. Equity transfer $100,000 to S Corp. The sole proprietor wants to gift 20% to his office manager.

I understand that the 20% value has to be taxed as payroll to the office manager, however, I am having an issue on how to enter into the accounting to reflect the proper capital stock and basis for the 80% shareholder and the 20% gift.

Assistance would be greatly appreciated!

Thanks,

Sandy

[Snaggletooth]

No Equity Change

Sandy, there is no change in equity. There is still $100,000 in capital stock. The only difference is the original owner now owns $80,000 and the new shareholder owns $20,000.

There are no entries on the ledger of the corporation, as there is no difference. However, the Treasurer needs to record the transfer of 20% of the stock, and recalibrate the stock certificates, if any.

I'm not sure about the compensation, as she should receive a W-2 for 20% of the VALUE of the stock. This might NOT be $20,000. If the corporation is new, and there are no assets other than $100,000 in cash, then the $20,000 on her W-2 might fly.

Payroll taxes and withholding is still due on the compensation. There are ways to structure it such that the cash is not taken from the employee, but it is not very straightforward and does decrement the stock somewhat. Or the employee may have additional compensation as a bonus to cover the withholding. Messy.

[JON]

Old stockholder "gifting" or

is the corporation giving the stock on a new issue. If a gift you have no W-2, that is one stockholder gifting to the office manager. The office manager would then have the same basis in it as the previous stockholder and no entries on the books. If the corp is giving the stock then you have the FMV of the stock as compensation and the "net" check would be a capital addition not paid out in cash. Remember 20% ownership would be discounted for lack of marketability and minority interest which should be a substantial discounts.

[S T]

Thanks

Thanks Snag and Jon,

Sandy

[Snaggletooth]

Jon is correct

is the corporation giving the stock on a new issue. If a gift you have no W-2, that is one stockholder gifting to the office manager. The office manager would then have the same basis in it as the previous stockholder and no entries on the books. If the corp is giving the stock then you have the FMV of the stock as compensation and the "net" check would be a capital addition not paid out in cash. Remember 20% ownership would be discounted for lack of marketability and minority interest which should be a substantial discounts.

Sandy after clearing my head, Jon is correct. No compensation if a gift, but if more than $12000 there would be gift tax due (I'm assuming they are not husband and wife), plus no change to be journalized in the equity section as I mentioned before. Apologize for misleading statements in my prior post.

Thanks Jon.

[S T]

Corp

Not a gift from the other shareholder (not h/w) treating as Jon outlined, that is what was probably confusing me and the accounting entries. I probably wasn't exaclty clear in my post either, as I really didn't have a grasp on it.

W-2 was grossed up and deduction or net was sitting in the Corporate Accounting.

So hopefully all treated correctely.

Good information from you though as well in case a shareholder wanted to gift out. Might have one of these on a partnership.

Thanks

Sandy