Closing a Sub S Corporation

[Diane]

My client has sold off the equipment in his Sub S corporation. He has an outstanding loan to the corporation of $950,000. Even with the sale of the assets, there isn't enough to pay the loan back to him. How is the unpaid loan handled on the final tax return? The corporation has not made a profit since it started.

Diane

[OldJack]

Gain or loss from the sale of assets flows to the 1120S-k1 for his 1040. The balance of the outstanding loan is either a business bad debt deduction (form 1040-4797) or capital loss (1040-Sch-D) calculation on liquidation of the corp depending upon the facts. The 1120S balance sheet would show no assets and a debt still unpaid and the capital accounts. The Corp may need to issue 1099-DIV, box 8 or 9.

[Diane]

Since he has sold off all the assets, has no cash, etc. -- would this be considered a liquidation? I have kept track of his stock basis and loan basis, calculating all the losses passed through to his 1040. The loan on the books will not be the final basis of his loan.

Diane

[OldJack]

Where did the proceeds from the sale of assets go if not cash distributions to the shareholders which would reduce shareholder individual stock tax basis? Official liquidation would be determined by state law, normally with a filing with the Secy Of State of by default of not filing certain forms with the state. Federal is recognizing state law and filing a final 1120S tax return.