Jump to content
ATX Community

Sale of S-Corporation Stock


JackieB
 Share

Recommended Posts

Hello - 

I have a corporation client who has sold the stock to new owners. I just want to make sure I am understanding the future tax filings correctly.

My understanding is for the S-Corporation return, it can be done in two ways.

1. Do a short tax year for the original owners from 1/1/2021 - 8/5/2021 and another short tax year for 8/6/2021 - 12/31/2021 for the new owners.

2. Do one tax return showing the K1s prorated for the ownership change on 8/5/2021.

Is that correct that it can be done either way?

Follow-up: There was payrolls under the new ownership and old ownership. Do I file just one 941 showing both?

Link to comment
Share on other sites

Doing one tax return with K-1s prorated does not apply your clients specific situation.

No you cannot file one 941.

In your client's specific situation:

1.  You will need to file two short year returns

2.  Since there are employees involved your clients are required to obtain a new EIN.

Link to comment
Share on other sites

1 hour ago, cbslee said:

Doing one tax return with K-1s prorated does not apply your clients specific situation.

No you cannot file one 941.

In your client's specific situation:

1.  You will need to file two short year returns

2.  Since there are employees involved your clients are required to obtain a new EIN.

Really? I thought the entity would remain intact with the same EIN. I had one a few years ago but the new owners had their own CPAs so I wasn't involved in the nitty gritty.

Link to comment
Share on other sites

I also thought that the EIN would remain in tact since they purchased the actually INC.

Will it let me get a new EIN number with the same name, address, etc? Normally it would catch that and not allow for a new EIN since the IRS thinks they have one already? 

Link to comment
Share on other sites

I agree with Abby Normal that the corporation remains intact, continues to use the same EIN and payroll continues uninterrupted. You can close the books as of date of sale to determine the income or loss for the selling stockholders, and then reopen the books for the rest of the year to determine the income or loss for the purchasing stockholders. The corporation would file one tax return for the entire year. The mid-year closing would only be used to allocate profit/loss.  cbslee may be thinking of partnership rather than corporation.

  • Like 1
Link to comment
Share on other sites

When employees are involved and their is a complete ownership change, I believe a new EIN is required.

The reason for this requirement is that EINs cannot be transferred to a new responsible party.

In addition, the old owners need to close the old EIN in order to protect themselves.

Link to comment
Share on other sites

11 minutes ago, cbslee said:

When employees are involved and their is a complete ownership change, I believe a new EIN is required.

The reason for this requirement is that EINs cannot be transferred to a new responsible party.

In addition, the old owners need to close the old EIN in order to protect themselves.

Do you know where I would find that on the IRS website or anywhere else? I just want to verify.

Link to comment
Share on other sites

6 hours ago, PapaJoe said:

You can close the books as of date of sale to determine the income or loss for the selling stockholders, and then reopen the books for the rest of the year to determine the income or loss for the purchasing stockholders.

The books can be closed for K-1 purposes by an election under 1377(a)(2) or 1.1368-1(g).

Otherwise the pro-rata method is required where allocation is made based on number of days stock was owned for the taxable year.

 

  • Like 1
Link to comment
Share on other sites

Okay, yes - so I have filed Form 8822-B to change the responsible party for the EIN. We will also be filing the 1120S with the election 1377(a)(2) to treat the corporation's tax year like it consisted of 2 separate tax years, the first of which ends on the date of the shareholder's termination. 

Thanks for everyone's help!

Link to comment
Share on other sites

Danrvan is correct.  You should check to see if there is a shareholder agreement that details which method the now-former owner stipulated to use in the event of sale of the S corp stock.

Also, check to see if the buyer and seller agreed to a particular method at the time of sale.

If you are the continuing tax preparer and advisor, you may have a conflict advising both parties on this issue because what may be good for the seller won't necessarily be good for the purchaser of the stock.

These are older articles but still apply that discuss the allocation methods, and the second one specifically shows how the allocation to each side may either be beneficial or be detrimental.

https://www.thetaxadviser.com/issues/2010/dec/clinic-dec2010-story-09.html

https://manningleaver.com/resources/articles-alerts/s-corporations-few-buy-sell-issues-consider

  • Like 1
Link to comment
Share on other sites

They are staying with me to finish up the tax year, then the new company is going to a different firm. 

The only thing they have stipulated in the agreement is that old owners will pay their share of taxes on their income/expenses and vice versa. I will be verifying with both parties about the election 1377(a)(2) and that they are all in agreement. 

Thanks for the articles. Very helpful. 

Link to comment
Share on other sites

4 hours ago, Gail in Virginia said:

I think (although could be wrong) that you can continue to use the same EIN but you have to file an 8822-B indicating a change in the responsible party if the shareholder who was the responsible party is no longer involved for whatever reason. 

While Form 8822 B is used for the change in a responsible party, it is not used for a change in ownership.

Unfortunately the IRS guidance in this area is not as clear as it should be.

Link to comment
Share on other sites

On 10/11/2021 at 1:44 PM, PapaJoe said:

thinking of partnership rather than corporation.

That would have been under the technical termination rule prior to 2018, which was repealed by TCJA.

But even then, the "new" partnership would retain the ein of the old under a technical termination.

 

Link to comment
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Restore formatting

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
 Share

  • Recently Browsing   0 members

    • No registered users viewing this page.
×
×
  • Create New...