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Max W

Sale of S-Corp

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Client was a passive S-corp member and received a final K-1S for 2017 when the corp was sold. It was a commercial rental warehouse. The final escrow statements shows selling price $230,000.  Closing costs $14, 486.

The K-1 has uncaptured 1250 gain  $16821;  Box 9 1231 gain $211,971;  Box 16D items affecting basis $258,000

1. the 1231 gain carries from the K-1 directly to from 4797 (Drake).  Since this doesn't match the escrow price, should I enter the difference between that and escrow on 4797.

2. Is the $258K, box 16D, the basis?  

TIA

 

 

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You should enter the unrecaptured gain and box 9 1231 gain as they appear on the K-1 with no additional adjustment necessary.

Box 16, code D indicates that is the amount of distributions paid to the shareholder during the year that reduce the shareholder's basis.

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1 hour ago, jklcpa said:

You should enter the unrecaptured gain and box 9 1231 gain as they appear on the K-1 with no additional adjustment necessary.

Box 16, code D indicates that is the amount of distributions paid to the shareholder during the year that reduce the shareholder's basis.

Since this was the final K-1, would the Box 16 D constitute the basis of the sale, or is more info needed?

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Max, as Judy said Box 16D is the amount of distribution to the shareholder that affects their basis. So the answer to number 2 in your OP is no. However, without further detail the amount in 16D could contain a portion of the gain of the sale that was distributed to the shareholder. Can't determine that unless you see all the transactions and basis history detail. I don't thi9nk you would make any adjustments just enter the items in the appropriate boxes as indicated on the K-1.

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UPDATE

Client was able to provide all the K-1's for all years pertaining to the S-Corp.

Each years showed Gains of about $5000 and cash distributions of about the same amount.

Could the final K-1S, Box 16D be taken as the basis.  There were no Basis worksheets.

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The answer still may, or may not, be 'no' unless the client put nothing, no cash or no property, into the S Corp at acquistion of his shares.  You need to know the initial investment and then you will be able to use the activity and disrtributions on all of the K-1s to reconstruct the basis. 

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Maybe I should be more clear. There should have been some initial investment this person made in exchange for his shares in the S corp that would be his initial basis that is adjusted each year for his share of the S corp activity on the K-1. Don't forget to account for any nontaxable income, nondeductible expenses, as well as the distributions he received each year when calculating his basis. 

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The initial contribution was $94,000.   There were no entries on the K-1's that would require an adjustment.  Most years the only entry was Rent received, but that was offset by an approximately equal distribution.   It looks like the distributions were rounded off, so there was a slight difference between gain and  a plus distribution of a total of $600  (approx $100/yr ).

The business was very simple.  It was the rental of an old warehouse.

 

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51 minutes ago, Max W said:

There were no entries on the K-1's that would require an adjustment. 

I did not suggest that there would be.

The S corp shareholder's basis in his shares starts with his or her initial investment, and each year it will change for the items on the K-1.  It increases because of the income that flows to the shareholder, and it decreases for things like nondeductible expenses and distributions.  There is a specific order that is followed for each year's increases and decreases.

Below is a pdf worksheet for calculating a shareholder's S corp basis. It is somewhat general, so please keep in mind that the gains reported on the K-1 will go on this worksheet on one of the blank lines for other income. There is also a line for the distributions lower down in the bottom section. Most tax programs will automatically create this basis worksheet for us if we ask it to. It's too bad that the preparer of the S corp return didn't provide this to your client.  In your case, the first year would start with -0- basis from the previous year and then add the $94K contributed, then the items from each line of the K-1.

You will need to complete a basis worksheet for each year the shareholder was in the S corp, starting with the first year, and the ending basis of each year carries over to become the starting point for each subsequent year's calculation. 

Also below is an article from the Journal of Accountancy that discusses the basics of calculating basis in an S corp. It's from 2012 but the concepts remain the same. 

S_Corporation_Shareholders_Adjusted_Basis_Worksheet.pdf

https://www.journalofaccountancy.com/issues/2012/jan/20114319.html

 

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On 8/20/2020 at 1:12 PM, Max W said:

Client was a passive S-corp member and received a final K-1S for 2017 when the corp was sold. It was a commercial rental warehouse. The final escrow statements shows selling price $230,000.  Closing costs $14, 486.

Max, it looks to me like you could be dealing with a sale of the warehouse by the S-Corp; instead of a sale of the S-Corp stock.

If it was a sale of the stock, then I don't see why the final K-1 would show the sale of real estate.

If it was a sale of real estate by the S-corp, then you need to compute gain or loss on the liquidation of the S-corp.

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I'm wondering if the client also received other funds as a liquidating distribution, or if the liquidating distribution was included in the amount on line 16D of the K-1 instead of on 1099-DIV, or if client also received 1099-DIV for that part of this puzzle.

Max W, do you have a 1099-DIV with amounts in either box 9 or 10? Or, did the client receive more in distributions than was reported on line 16D of the K-1?

 

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19 hours ago, DANRVAN said:

Max, it looks to me like you could be dealing with a sale of the warehouse by the S-Corp; instead of a sale of the S-Corp stock.

If it was a sale of the stock, then I don't see why the final K-1 would show the sale of real estate.

If it was a sale of real estate by the S-corp, then you need to compute gain or loss on the liquidation of the S-corp.

It was a real estate sale of the warehouse.

 

9 hours ago, jklcpa said:

I'm wondering if the client also received other funds as a liquidating distribution, or if the liquidating distribution was included in the amount on line 16D of the K-1 instead of on 1099-DIV, or if client also received 1099-DIV for that part of this puzzle.

Max W, do you have a 1099-DIV with amounts in either box 9 or 10? Or, did the client receive more in distributions than was reported on line 16D of the K-1?

 

No DIV's, no INT, nothing more than rental income.

To add another twist, the initial $94K basis consisted of closely held stock inherited from the mother who had a business which included the warehouse. The mother had died many years before and the basis wasn't determined until the year after the property was sold, so it did not show up on any K-1's.  It required an evaluation in 2018 by a CPA.      Whether it was added to the final K-1, the client doesn't know.

The client was one of 5 siblings.   I hate to do this, but I am going to ask him to get a copy of 4797 from one of his siblings.

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3 hours ago, Max W said:

It was a real estate sale of the warehouse.

So you will have two transactions to report: the shareholder's allocated gain from the k-1 and the capital loss that should result from the liquidation.

 

On 8/20/2020 at 1:12 PM, Max W said:

1. the 1231 gain carries from the K-1 directly to from 4797 (Drake).  Since this doesn't match the escrow price, should I enter the difference between that and escrow on 4797.

The gain comes from an internal transaction dependent upon the adjusted basis of the building in the hands of the S-corp.

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56 minutes ago, DANRVAN said:

So you will have two transactions to report: the shareholder's allocated gain from the k-1 and the capital loss that should result from the liquidation.

 

The gain comes from an internal transaction dependent upon the adjusted basis of the building in the hands of the S-corp.

That's what I have. Two transactions on 4797; the 1231 Gain by itself; and a line with the sales price, 1250 Recap and the Cost basis to be filled in.

Does this sound right?

 

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14 minutes ago, Max W said:

That's what I have. Two transactions on 4797; the 1231 Gain by itself; and a line with the sales price, 1250 Recap and the Cost basis to be filled in.

Does this sound right?

 

No, that's not right.   There are 2 separate things that happened.  First, there is the sale of the warehouse by the S corp, AND second, there is the liquidation of this client's shares of stock in the S corp.

FIRST, regarding the sale of the warehouse:  The building was sold by the S corp and reported on the corp return. Your client's share of the NET gain flows onto his K-1. There are 2 items on the K-1 that are related to this sale and those 2 figures are what you need to enter into the software related to this gainYou don't enter proceeds or the building's basis because the S corp already did that.  Just enter the 2 figures from the K-1 of $16,821 for the unrecaptured 1250 gain and the $211,971 for the 1231 gain. Don't enter the escrow figure either or worry about reconciling that; it is only informational. 

SECOND, you also have the liquidation of the shares of ownership in the S corp that should be a loss, and that is a capital loss that will be reported directly on Schedule D

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Max, to be simpler and more clear about the warehouse sale:  the form 4797 should show only the $211,971 in part one and Drake will use the label "from K-1". That is the entire net gain and is all that should be on that form. just that one figure. From there, that net gain figure will flow onto the Schedule D on line 11.   The unrecaptured 1250 gain of $16,821 is the portion of that gain that has the potential to be carved out and taxed at 25% because of the depreciation method used for the warehouse, and it will show on line 19 of Sch D, the "Wks CG" worksheet, and the "Wks 1250" worksheet. That is all that should happen related to the warehouse.

 

As I said in my post immediately above, you still also will have to report the liquidation of this client's shares of stock in the S corp too, and that will go directly on Schedule D.

Hope that helps you.

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There are a couple ways to report the liquidation. but the answer is the same.

Assume the basis was $94,000 on 12/31/16.

Add to that the reported 2017 gain of $211.971= $305,951 basis before liquidation.

Assume the $258,000 reported in box 16d is the liquidating distribution.

Loss = 258,000 - 305,951 = (47,971).

As understand it, your client owns 1\5 of the shares which were inherited.  However the closing statement you mentioned seems to report only your client's share.  I am curious as to who the closing statement shows as the seller?

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On 9/2/2020 at 12:31 AM, jklcpa said:

Max, to be simpler and more clear about the warehouse sale:  the form 4797 should show only the $211,971 in part one and Drake will use the label "from K-1". That is the entire net gain and is all that should be on that form. just that one figure. From there, that net gain figure will flow onto the Schedule D on line 11.   The unrecaptured 1250 gain of $16,821 is the portion of that gain that has the potential to be carved out and taxed at 25% because of the depreciation method used for the warehouse, and it will show on line 19 of Sch D, the "Wks CG" worksheet, and the "Wks 1250" worksheet. That is all that should happen related to the warehouse.

 

As I said in my post immediately above, you still also will have to report the liquidation of this client's shares of stock in the S corp too, and that will go directly on Schedule D.

Hope that helps you.

Judy, Thank you very much for your help.  You were especially helpful to go out of your way to locate the form and worksheet where the entries appear.  It has been a learning experience for me, since it is the first time in 20 years of tax practice to encounter this dual feature of a sale.

On 9/2/2020 at 7:54 AM, DANRVAN said:

There are a couple ways to report the liquidation. but the answer is the same.

Assume the basis was $94,000 on 12/31/16.

Add to that the reported 2017 gain of $211.971= $305,951 basis before liquidation.

Assume the $258,000 reported in box 16d is the liquidating distribution.

Loss = 258,000 - 305,951 = (47,971).

As understand it, your client owns 1\5 of the shares which were inherited.  However the closing statement you mentioned seems to report only your client's share.  I am curious as to who the closing statement shows as the seller?

Thank you for your help in walking me through the procedure. It helps me to understand what I am doing.    The closing statement had the full amount and the clients share was prorated accordingly.

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