1120-S K-1 number of shares?

[avjunior]

The K-1 for the 1120-S starting in 2020 has boxes for number of shares at beginning and end of tax year.  The 2021 K-1 wants the shareholder's number of shares as well as the corporation's total number.

Our S-Corp is an LLC and is owned by my wife (51%) and myself (49%).  I don't remember anything about having stock or issuing shares since we set it up.

How would I enter these values?  Can I just say it has 100 shares and my wife has 51 and I have 49?  Can I leave these boxes blank?

For the new 7203 I've kept track of basis on Schedule M-2 every year.  This is just in dollars.

Thanks!

[Mike9241]

the 7203 is not asking for shares it's asking for block number (not the number of shares) - leave blank or enter 1 for each of you since this is an LLC that evidently elected to be taxed as an S-Corporation it's unlikely that state law would require shares to be issued. but that's a legal question. 

the instructions for the 7203 doesn't address the issue of an  LLC that elected to be taxed as an S-Corp but under state law is not required to actually issue stock.   

this is all the instructions say

Stock block. When a
shareholder has a different
basis in different blocks of
stock, pass-through items are
generally allocated pro rata to all
shares, regardless of their different
bases. If there is a partial stock sale or
partial redemption, you may file more
than one form and provide a
description of what period the form
covers. See Regulations section
1.1367-1(b)(2) and (c)(3) for details.

[avjunior]

Yes you are correct- we are an LLC that elected to be taxed as an S-Corp.  From googling it seems that LLC's cannot have or issue stock.

It would appear the instructions for the 1120-S K-1 doesn't address our case of being an LLC?

I'm inclined to leave the new K-1 Boxes D and H empty.

[avjunior]

I did find one article that addressed what an LLC should do for K-1 boxes D and H.  It said an LLC without stock should enter "number of units or other equivalent to S-Corp stock".

Have no idea what this means.

[Anonymous_]

An LLC typically defaults to being classified as a partnership. There are a number of different types of partnerships.

Units in partnerships typically represent percentages of ownership. For example, one (full) unit would normally be considered 1% ownership in the partnership. 

If you have only one other partner and your articles do not specify otherwise, then you can consider your partnership to have 100 units (totaling 100%) and you each have 50 units if you have equal ownership.

[avjunior]

Thanks for your reply.  This sounds good- I'll enter in box D 100.  I'll enter in box H 49 for me and 51 for my wife corresponding to our percentages in box G.

I hope it will be obvious to the IRS what's happening because our name in box B has 'LLC' after it.

And I think the 1120-S K-1 instructions should have a paragraph or so treating LLC's that have elected S-Corp status.  If you search the instructions for 'LLC' there are no hits :-(.

[Anonymous_ · Accepted solution]

@avjunior 

See https://www.irs.gov/instructions/i1120s#en_US_2021_publink100077082

Item D

Report the total number of shares issued and outstanding at the beginning and end of the S corporation’s tax year. An entity without stock, such as an LLC, should enter the number of units or other equivalent to S corporation stock. Round the number of shares to the nearest whole number (but not below zero). For example, round 0.6315 up to 1.

[avjunior]

When I googled for 1120-S K-1 instructions I got this pdf which doesn't mention LLC's:
https://www.irs.gov/pub/irs-pdf/i1120ssk.pdf

Your link is much better :-).

I read another article that said ownership interest in an LLC can be done in two way- units or percentage.  This all still seems kind of a kludge to me because our LLC has no units.  I don't know what personal tax software for preparing 1040's will do with boxes D, G and H.  Before 2020 there was only the allocation percentage (now Box G) on the K-1.

What one needs for a non-dividend distribution (Box 16 code D) that now triggers requiring form 7203 is basis, and none of these K-1 boxes provide that.  It must be kept track of by the member.  However for our simple two-member LLC I think basis is the shareholder's percentage times the amount in the 1120-S page 5 Schedule M2 line 1, "Balance at the beginning of the tax year".

[Mike9241]

while an LLC can have many classes of partners with different p&L %'s depending on the item this is not so for an LLC that elects S-Corp status. By tax law there can only be one class (not really true since some shares can have voting rights while others do not) but the % interest doesn't vary in doing the allocations unless one LLC member were to contribute more money (ie in corporate parlance has bought another block of stock) so before that date the old %'s are used and then after the % are recalculated to do the allocations for the year

S-Corp election for LLC - a poor example: H puts in $51 and W puts in $49 (block 1) (or H makes a gift of part of his interest and this can be done in other ways). They agree on splitting things 51/49 this would apply to everything including distributions because now tax laws apply to the LLC.  this can be especially important when it comes to distributions because if they are not proportionate to ownership, the IRS could declare there is a second class of stock which would void the S-Election.    

now H wants a higher ownership %. W can gift H part of her interest (gift tax return may be required)  

or H puts in another $100 (block 2) and they agree that H now owns 151/200 and W now owns (49/200)

the allocation for the year is based on the weighted average of ownership for the year so if on day 181 the ownership % changes

the computation for allocations of p&L would be H 51/100*180/365+151/200*185/365

and for W 49/100*180/365+49/200*185/365

note that distributions prior to ownership change are based on the ownership %'s at that time afterward they're based on the new ownership%

note that you should confer with a lawyer. certain documents may need to be prepared to reflect the ownership change. should the iRS audit the LLC/S-Corp you do not want them changing allocations because of a lack of documentation. this could have a significant impact on your taxes