Do you show final liquidating distributions by an S-Corp on Sch K and K-1 (Line 16D) or on 1099-Div Box 8 and/or Box 9 in exchange for Corp stock?

You have a couple of things going on here:

• When an S corporation distributes property (noncash) in complete liquidation of the corporation, the corporation recognizes gain or loss as if the property were sold to the distributee at its fair market value.  The gain or loss flows through to the shareholders under the normal S corporation pass-through rules.  
• Shareholder's then update their basis schedule for the impact of the final K-1 applicable line items.
• Once the basis schedule is updated, the shareholder can determine their gain or loss; if after you adjust the basis for the liquidating distribution you still have basis remaining, you have a capital loss.  If the liquidating distribution exceeds your basis, causes basis to go below zero, you have a gain to the extent of this "negative" amount.
• Liquidating distributions of S corporations are reported on form 1099-DIV boxes 8 and 9 (cash or noncash)

So according to my example I would show $1500 in box 8 and $2000 in Box 9 on each 1099-Div.  OK.  So does $7000 (total distribution) go on Line 7 on Schedule M-2?  Won't I need to show the FMV on a schedule to each s/h showing their new basis of the assets received?

Responses to your follow-up questions:

1) Yes on the 1099-DIV presentation
2) No.  The liquidating distributions do not get reflected on the Schedule M-2.
3) Yes.  This information would be helpful to the shareholder's especially if multiple assets were distributed.  This can be done either as a footnote or on a separate schedule.

Hi Rick,

Thank you for these helpful tips!  I just want to clarify with you to make sure I understand correctly.  Similar to the original poster, I have liquidated my S-Corp, and the remaining $5,000 in cash was distributed to me, the sole owner.  This matches my basis exactly, so there is no resulting gain/loss.

I was going to report the $5,000 as a normal S-Corp distribution on the K-1, but it sounds like that is not correct since this is a liquidation.

1. Does this $5,000 NOT get reported on the 1120-S anywhere?
2. To report this $5,000 liquidating distribution to the IRS, do I just issue a 1099-DIV and put the $5,000 on Box 9 (Cash Liquidation Distributions)?
3.  When I fill out my personal 1040, will it give me the opportunity to enter the basis ($5,000) so that the 1099-DIV amount will result in no gain?

Thanks so much for your help!

@SandalsCA my responses to your questions:

1. No
2. Yes
3. Yes.  Just report this on form 8949 which will then summarize on Schedule D.  Once you report the liquidating distribution of $5,000 (as a sales price) and your tax basis of $5,000 you will arrive at zero gain or loss.  Just call it S Corp liquidation.

Hi Rick,

Thank you for your response.  I really appreciate your answer to these questions.  I forgot to mention that this is an LLC taxed as an S-Corp.  Does that change things?  I'm not sure how to report the 1099-DIV, Box 9 liquidating distribution on my 1040 because it was not a stock sale (since an LLC cannot issue stock).  Do I still use Form 8949 and call it something like XYX LLC Liquidation?

Follow-up responses:

• Since you made the election to be taxed as an S corporation (for federal tax purposes), you will continue to treat all transactions as if they were made by an S corporation.  So "no", it doesn't change anything
• Don't get hung up on that nothing was actually "sold".  Just pay attention to the questions when you are entering the form 8949 item.  It should still be called XYZ S corp liquidation" since you are an S corporation for federal income tax purposes.
• Also don't forget to contact your Secretary of State in case there are some forms that need to be handled at that level.

Thank you so much for sharing this information, it was super helpful in me understanding what to expect when it's reported on the individual's return.

Just a quick question to make sure I understand properly: if an individual received a 1099-DIV reflecting cash (Box 9) and noncash liquidation distributions (Box 10), both of the distributions will added together as a total proceeds on Schedule D & Form 8949 , correct?

Thank you very kindly again!!

You are correct, they will add together on schedule D.

THANK YOU so very much, the clouds have just parted!

I really appreciate the help!

 To make sure I understand ,what is meant by the "liquidating distribution"? Is that the Cash and the FMV of any non cash Assets?

The shareholder has adjusted their basis in the s corp by the gain or loss  the S corp recognized when disposing at FMV through the S corp Asset Entry worksheets.

Then on the Shareholder's Personal 1040 they compare their updated basis to the value of the Cash and Non Cash assets  received to see if they have a capital loss or gain to be reported on the 1040?

This community is so helpful!

@Mary100 that is correct.

However, there are a couple of issues here that need to be clarified:

• Sometimes the final K-1's include liquidating distributions; which is technically not correct.  If the liquidating distributions are reflected on the K-1, do not adjust your basis by these amounts.  These amounts will be the "selling" price when you enter this on your personal tax return form 8949.
• If the final K-1's do not reflect the liquidating distributions (the liquidating distributions are properly reported on form 1099-DIV) then use the 1099-DIV figures as your "selling" price when you enter this on your personal tax return form 8949.

@Rick19744 

Hi Rick, I see that you are very knowledgeable about the S Corp liquidation, basis, etc.  I have a situation, would appreciate your input.

The S Corp has one 100% shareholder, and it will be closing down. The liabilities of the S Corp are higher than the assets. I want to make sure that I handle all closing entries correctly and report it all correctly on 1120S and on 1040. So, I understand that we are selling all assets and using all cash to pay down debts. However, even after that, there is a still a SBA EIDL loan balance (business assets is the collateral for that loan and the shareholder is personally liable for the loan). The shareholder will not get any distributions, obviously, since the assets won't even cover the debt. So, seems, the shareholder will personably assume the SBA EIDL Loan balance. Questions:

1. How do we reflect that the shareholder will assume the balance of that debt and how do we report it on 1120S and or 1040 or do we? And on books, do I zero out the SBA EIDL debt into retaining earnings on the balance sheet to remove it from the S Corp liability ?

2. The shareholder's capital stock is listed on the balance sheet as $5,000. He gets no distribution in exchange for the stock. What happens with the stock in this situation? How do I handle it on books and on tax returns?

3. The shareholder has zero stock basis. And suspended/unallowed losses from prior year due to the basis limitation. Those suspended/unallowed losses can't be claimed on 1040 upon dissolution of the S Corp, correct?

Thank you for your help!

A few comments regarding your questions:

• When you sell the assets this will generate a gain or loss.  This will be a corporate level gain or loss that is passed through to the shareholder on the K-1.
• The cash will then be used to pay down the debt.  At this point, you shouldn't have anything listed in the asset section; as there are no more assets (you indicate that nothing is being distributed to the shareholder).
• I would just leave the debt on the balance sheet.
• Just leave the capital stock on the balance sheet.
• As the shareholder pays off the debt, they will get a capital loss equal to the principal paid on the debt.
• No additional losses will be able to be deducted, since as you noted, there is no basis. 
• Make sure you dissolve the corporation with the Secretary of State.

Thank you, Rick! So the final balance sheet and the final 1120S would have zero assets, one debt, capital stock and retaining earnings. Sounds accurate?

In regards to this : "As the shareholder pays off the debt, they will get a capital loss equal to the principal paid on the debt."

The shareholder likely won't pay off the debt in the same year the 1120S final is filed, and the corporation is dissolved, so when he does, no other adjustments on the balance sheet can be made or would need to be since the corporation would be dissolved at that point, correct? And no interest expense can be taken at that point anymore, correct?

And, do we use Form 8949 to generate a capital loss? The basis would be the amount of the debt and proceeds as " zero"? And the 3k a year capital loss limitation would apply to this? 

Also, likely the Corporation's final return will have a loss so the K-1 will reflect the loss. Since the shareholder has no basis, he would not be able to claim that loss on 1040, correct? So the loss is suspended and lost? Or would this assumed debt create debt basis for the shareholder to be able to do that?

@Rick19744 

Follow-Up responses:

1. You are correct in your balance sheet presentation statement.
2. As the debt is paid off, on form 8949, the shareholder will show a cost basis of the principal amount paid and no sales proceeds.  This will be LT and you can describe it as "S corp debt payment" or something along those lines.  This will just be included in any other capital gain / loss transactions the shareholder has in their personal tax return.
3. In item 2, this is the point that the S corporation shareholder satisfies the economic outlay requirement.  This essentially is an increase in capital for the principal and since no "proceeds" are received for the stock, generates the capital loss.
4. You are correct in that no further adjustments to the S corp balance sheet necessary once a final return is prepared.  Make sure you maintain a copy of the loan agreement and the principal outstanding upon liquidation.  Update this as the debt is paid down.
5. The suspended losses will be lost. 
6. No basis, no losses allowed to be taken at the shareholder level.

Thank you, @Rick19744 

In regards to two of your comments:

1. "As the debt is paid off, on form 8949, the shareholder will show a cost basis of the principal amount paid and no sales proceeds.  This will be LT and you can describe it as "S corp debt payment" or something along those lines.  This will just be included in any other capital gain / loss transactions the shareholder has in their personal tax return."

There is no way, this can be classified as ordinary loss? The debt is close to 300k. With the capital loss, we only would be able to deduct 3,000 per year.

2. "In item 2, this is the point that the S corporation shareholder satisfies the economic outlay requirement.  This essentially is an increase in capital for the principal and since no "proceeds" are received for the stock, generates the capital loss."

To clarify this. You are saying that after the debt is paid off, we also can claim a capital loss for the stock on 8949?

Thank you so much!

Following up on your last 2 questions:

1. No.  This loss is related to the liquidation of the S corporation and the stock of the shareholder which is a capital asset.  This is no different than if the shareholder contributed sufficient $$ to the S corporation, paid off the debt at the S corporation level and then liquidated.  At that point you would have zero cash distributed, an increase in capital account  (basis) equal to the $ contributed to pay the debt and then a capital loss on liquidation.
2. Not sure I understand this question.  But to clarify, you will generate a LT capital loss for any principal repaid as a result of the shareholder guarantee, as the debt is repaid.  That's it.  Nothing more.
3. In summary, the S corp has liquidated, the shareholder will generate a LT capital loss as they pay off the principal of the debt that was guaranteed and the suspended losses are lost as a result of no basis.

I am working on the final 1120S and I have a Balance Sheet with $20,000 in Cash and $20,000 Retained Earnings.  My two 50% S/H will each receive $10,000 in cash as a liquidating distribution.  How to I enter this on the tax return so that I zero out cash and RE?  

Just by marking the tax return as final and skipping the balance sheet section will solve your problem.  Since the assets of the business at year-end are less than $250,000 (the requirement to file is assets and income over $250,000 for an S-Corp) you are not required to complete the balance sheet.  Be sure to list the $10,000 distributions for each shareholder as well.

@mmdevost

@mmdevost 

The liquidating distributions do not get reported on the K-1's.

These should be reported on a form 1099-DIV; boxes 9 and 10 as appropriate.

Thank you both for your help.  Should the 7203 show the liquidating distribution (that is on the 1099-Div) on line 13 as Other items that decrease stock basis?

I am a bit confused on how the liquidating distribution (that is on the 1099-Div) shows up on the tax return or the books.  Do I not need to tie these out to show a RE of zero?

The liquidating distribution should not go on the 7203.

At the individual level, when you enter the final K-1 information and indicate in TT that this is a final K-1, the liquidating distribution will be the "selling" price.

The liquidating distribution will not show up on the tax return of the 1120-S.

As far as the books and records, you can just show this as a distribution (equity) and as cash out.

Dr. Equity

Cr.  Cash

In a perfect world all should balance out.  

Rick, thank you so much for this advice.  I feel confident that I am doing the TR correctly.  In a perfect world is right... the Jan interest just hit the checking account... luckily it is < $5.