OldJack

Form 1041 is an income tax form to report taxable income, not for reporting distribution of the value of assets to beneficiaries.

Its time personal federal income tax was repealed and replaced with some other revenue source.

>> He commented to me that there isn't really anybody checking this stuff, so a lot of people don't even file the 1099 Misc.<<

Implying that you should not report it on the income tax return?  

The IRS is itself political so it is impossible to comment on the subject without being political.  All talk on the subject of taxes has now become political with this liberal administration.

>>“You can deduct the premiums only if the S Corporation reports the premiums paid or reimbursed as wages in Box 1 of Form W-2 in 2014 and you also report the premium payments or reimbursement as wages on Form 1040, line 7”.<<

This is nothing new!  The S-corp reports the premiums as W2 income (and deducts as insurance/salary expense) therefore it is as 1040 W2 income on line 7 (offset by less S-corp income) and the individual taxpayer then takes his health ins deduction.  Its always been this way for an S-corp. It's just a pass through.

_{The resident state return usually has a form for that which is an attachment to the resident state.}

@TAXMAN, don't know I never considered that.

Thought I would share a form that I have used to Gross Up that Christmas bonus check for proper withholdings.

GrossUp.pdf

I agree with jklcpa that you need an actual sale with a signed note or payment.  You must determine if the Shareholder of the S-corp is selling his stock or if the S-corp is selling its assets.  If assets are being sold both parties must file form 8594, "Asset Acquisition Statement", with their tax returns.

Because only a few read the other forums.  You could do away with the other forums as far as I am concerned.

Probably because as an S-corp it must be treated as a sale at fair market value with gain or loss.  An S-corp is not allowed to convert to personal, that is only a partnership or proprietorship.

I would expect that your client is wanting a cash basis and "completed contract" basis for his tax return.  Unless he has been reporting on completed contract basis before, that would likely be a change in accounting methods for tax purposes requiring IRS approval.

You should NOT convert the accrual booked financial statements to cash basis.  GAAP requires the corporation to report on the accrual basis for its financial statements if presenting statements to third parties.  If your client understands how it could effect his credit he would probably not want you to do that.

Like a bad apple, the IRS is rotten at the core and should be thrown away!

Since those are still open years I would amend the tax returns to document the carryover.

I agree with John that it was deductible in the year of the loss and therefore is not carried forward.

OldJack:

I'm still interested in your line of thought.

The corporation would not incur any penalties because it incurs no tax liability.

Income on the 1040 would be essentially the same after all the dust settled.

What penalties would/could be assessed?

(And how would they compare to the reduction of 15% Self-employment tax?)

Check out IRC 6722 and Small Business Quickfinder Handbook page 1 of S-Corp tab regarding "incorrect information" on Sch K-1. The max post-2011 penalty ranges from $75,000-$500,000. Minimum would be $30-60 per K-1 failure.

Interesting, but I'm not processing this in the same way. In the extremely unlikely event that the auditor classified the distribution as a non-deductible expense of the corporation, what tax preparer would not think of amending the personal return and deleting the Schedule C? IRS can't have it both ways in this situation.

Of course the taxpayer would file amended 1040, but you miss the point that penalties can be assessed and the "tax preparer" would end up reimbursing the client for his wrongful filing.

It's an S corporation. There's no issue with dividends or double taxation. That would only come into play with a C corp or in the extremely unlikely event there are retained earnings locked up in the S corp from prior operation as a C corp.

And I doubt an auditor would make any adjustment, provided things are handled correctly going forward.

But I'd still stay away from any reclassification (either via Schedule C or via retroactive payroll), if it produced EIC.

Yes, if it is an S-corp a non-deductible expense increases flow-thru taxable income to the shareholder and the shareholder already has a 1040 Sch-C income equal to the expense resulting in duplicate income. Agree that most IRS auditors are not bright enough to think of non-deductible expense and duplicate income. Sometimes it just might be better to let a dead dog lie until the stink is gone.

>> after all doing the sch c way and if irs makes you change it to payroll the net taxes are the same. <<

1. You have no reason to believe that the IRS will agree net taxes are the same and could treat things separate and charge penalties.

2. On the Corp tax return you have an "expense" that is not ordinary and necessary, could be treated as a distribution of capital or dividends, therefore not deductible. IRS interest and penalties for underpayment of tax.

3. If the "expense" is reclassified as a dividend you have no deduction to the corporation but income to the 1040, therefore no amendment or change to 1040 taxable income.

4. If the 1040 must be amended you have opened the individual to possible other related tax disclosures on audit exam.

You are really gambling that an IRS auditor will agree with you. If I was an IRS auditor I would not agree with you.

Why not move the distributions to an expense and pick up the distributions as income on schedule C?

By definition an officer of a corporation is an "employee" which is why the IRS has the authority to reclassify officer distributions as salary. So what "employee expense", other than salary expense, would you classify it on the corp tax return?

• I agree that book value is tax basis, but disagree with using book value for stock value recorded on the corporation books as it is a standard accounting method to record the stock value at FMV. Most of your web research only talks about tax basis and therefore does not address the recording on the corporate books. FMV booking is especially needed where you have two 50-50 owners when one shareholder contributes cash and the other contributes property of equal value. Here is a quote on how one accounting textbook states for recording stock value on the corporation books:

  >>-----

  McGraw-Hill

  Noncash Acquisitions

  Companies sometimes acquire assets without paying cash but instead by issuing debt or equity securities, receiving donated assets, or exchanging other assets. The controlling principle in each of these situations is that in any noncash transaction (not just those dealing with property, plant, and equipment and intangible assets), the components of the transaction are recorded at their fair values. The first indicator of fair value is the fair value of the assets, debt, or equity securities given. Sometimes the fair value of the assets received is used when their fair value is more clearly evident than the fair value of the assets given.

  <<

Assets contributed are entered at their book value, not FMV. if you contribute $10,000 and you set par at $1.00 you would issue 10,000 shares, bit if you set par at $100 you'd issue 1000 shares. And yes, this iss 'contributed capital'.

I agree that book value is tax basis, but disagree with using book value for stock value recorded on the corporation books as it is a standard accounting method to record the stock value at FMV. Most of your web research only talks about tax basis and therefore does not address the recording on the corporate books. FMV booking is especially needed where you have two 50-50 owners when one shareholder contributes cash and the other contributes property of equal value. Here is a quote on how one accounting textbook states for recording stock value on the corporation books:

>>-----

McGraw-Hill

Noncash Acquisitions

Companies sometimes acquire assets without paying cash but instead by issuing debt or equity securities, receiving donated assets, or exchanging other assets. The controlling principle in each of these situations is that in any noncash transaction (not just those dealing with property, plant, and equipment and intangible assets), the components of the transaction are recorded at their fair values. The first indicator of fair value is the fair value of the assets, debt, or equity securities given. Sometimes the fair value of the assets received is used when their fair value is more clearly evident than the fair value of the assets given.

<<

I think I like my way better - makes sense -

deals with the closing of the business

deals with the sale of the assets

been doing for 10 years

clean and neat

gives basis for new S Corp

no double numbers - ie basis

simple transaction

Besides how do you get the assets out of the Sch C? if you do not have a sale in 2013?

Thx D

The "anti-churn" rules do NOT allow you to create a new/higher tax basis from a sale of assets to a related entity. You must have been doing it wrong for 10 years if you have been depreciating a new basis (other than a carryover tax basis). Also a "sale" would mean you have to recognize a tax on gain at FMV as the transaction would not qualify as a tax free exchange for stock.

Does this result in your basis in the corporation potentially being greater than your basis in the assets placed in the corporation? Or less? Been a long time since I studied this.

You will have an inside basis (corp) and an outside basis (personal).