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?

[Rick19744]

@Clark2023 

The S corporation does not pay tax at the entity level; this is done at the shareholder level.

As a result, each shareholder maintains a basis schedule of the investment.  This basis schedule (now form 7203) is adjusted annually for the applicable lines on the K-1.

So at the end of the journey, if you receive a liquidating distribution that exceeds your basis, that means that you have a capital gain on the investment.  If the liquidating distribution is less than your basis, you have a capital loss.

[RobertB4444]

The S-Corp made a profit by selling the assets at the fair market value.  This profit was then transferred to the shareholders who deduct their basis from that profit.  If the profit from the sale of the assets at FMV is greater than their basis, they show a gain.  If less, they show a loss.  

@Clark2023 

[Marka81]

@Rick19744 

Hi Rick, you are extremely knowledgeable and helpful!!  I want to ask a question not related to the S Corp. Maybe you have an answer or could tag someone who does.

2021 Roth IRA excess contribution. Not reflected on the 2021 taxes.  The excess contributions and earnings have not been withdrawn yet. Will be done this year. Too late to recharacterize. My question is - I am getting contradicting information about how to handle it. Some say that you need to amend 2021 to reflect the penalty and the earnings. Some say do not amend since a 1099-R will be issued with her withdrawals then you reconcile it on 2023 tax returns? I can't find any official guidelines on this either.

[Rick19744]

A couple of comments:

• You need to get in contact with your service provider; who ever is handling your Roth IRA funds.
• You should have completed form 5329 with your 2021 tax return to compute the penalty.  So if this form was not included, you need to amend the 2021 return.
• This form is completed every year in which you have excess contributions and they have not been withdrawn.
• You need to address this ASAP.

[Marka81]

The form 5329 was not reported on 2021 taxes. I was told that 5329 can be filed as stand alone without amending the whole return. However, then how would you report the earnings for 2021 contribution which must be reported as taxable income?

Also, if we withdraw this year, the service provider will report that on a 1099-R for 2023 then how all that will work on 2023 taxes? 

[Rick19744]

Final comments:

• You can file the 5329 by itself if you have no other changes.  Make sure you use the 2021 version of the form 5329 when remitting.  Print out the instructions and review page 2.
• Service providers will typically determine the excess earnings and you will report it then.
• Work with your service provider as this forum is not conducive to handling this type of question with limited facts.
• You may be able to eliminate the 6% penalty for 2022 if you withdraw the excess by the due date of your return, which is why I recommend you contact them ASAP.
• Depending on your facts, you can leave the excess in and apply it to another year; ie: either 2022 or 2023 depending on your facts.  Once again, discuss with your service provider.

[Marka81]

• "Service providers will typically determine the excess earnings and you will report it then."

So, earning/interest earned on Roth IRA will have to be reported as taxable income on 2023 returns, right? It was my understanding that you must report the earnings in the year the contribution was made? 

"The withdrawal of contributions is tax free, but you must include the earnings on the contributions in income for the year in which you made the contributions."

https://www.irs.gov/publications/p590b#en_US_2021_publink100091157

• "You may be able to eliminate the 6% penalty for 2022 if you withdraw the excess by the due date of your return, which is why I recommend you contact them ASAP."

Is it if we withdraw the excess ( 2021 contribution and earnings) by the due date of 2022 returns or by the 2022 year end aka December 31, 2022 to avoid penalties? I thought it was by the year end. 

The service provider is not helpful sinc they claim those are tax questions. And no leaving the excess and applying  to another year is not an option since we would not be eligible due to income limitation.