Adjustments to Sub S balance sheet for dissolved corporation with outstanding shareholder loan balances

[jlondon11]

I am the sole shareholder of Sub S corporation which I dissolved in 2024.  Over the years, I loaned the company money, with a balance of $55k at the end of 2023, with stockholder equity of $28k, reflecting depreciation recapture when the properties were sold.  The properties were acquired and renovated in 2006 and 2008.  They were held as rentals as the market "collapsed".  Over the 15 years, values recovered enough to cover outstanding mortgages, but the properties sold for less than the land and building cost-basis, when placed in service. 

The final return completed by my accountant continues to show an outstanding loan balance on the final return, but does not reflect the stockholder equity.  The IRS requires final returns to be submitted 4 months after dissolution, so 2023 forms were used, noting that the return was "final".  It was submitted in November of 2024.

Does the return need to be amended to zero the balance sheet on the final return?   If so, can I do the amendment using 2024 forms?

My account told me I could make adjustments at the 1040 level using  form 7203 and Schedule D. How do I amend, or should I amend?  I don't want to open up a can of worms. When I look at Form 7203, I can't use the figures from the final return, as neither the retained earnings nor the loans are zeroed out on the final return. The only undepreciated property left is a phone that had a 1231 depreciation charge of $83.  Operating loss for the final tax year was $900, reflecting accounting fees and other minor expenses.

[RobertB4444]

You can use form 7203.  You can even use the numbers from the final return.  Your stock basis consists of all of the money that you invested into the company.  That should be reflected on this final form 7203.

Then the sale is entered onto schedule D showing a sale of your interest in the partnership for zero dollars.  The cost basis that you will enter on schedule D is the basis that you show on the 7203 which is the loan balance plus any other money you had tied up in the partnership that you never recovered.

@jlondon11 

[jlondon11]

Does it matter that the final sub s return still shows outstanding loan? Not sure how to convert loan bslance to paid in capital on form7203.  Thsnk you for your help

[RobertB4444]

No, the loan balance is part of your basis in the S-Corp.  And it should show as outstanding - they never paid it to you.  The way you close it is with the schedule D sale of the partnership.  

@jlondon11 

[Jady1952]

I have a similar situation with an S-corp closing with outstanding loans from Shareholders.  This was basically money contributed throughout the years.  I have reclassified as paid in capital.  there is 100.00 of Capital Stock, 77,002.00 of paid in capital and retained earnings is (77,102).  I just am unclear how to do the sch D transaction that is discussed in this post.  It would appear that the basis is zero and the sale is zero would you still input a sch d transaction for sale of the s corp with 0 sale and 0 basis.

Thank you for any help you can give me at this late date.

[RobertB4444]

No.  Zero sale and zero basis does not need to be entered.  As long as the S-corp has the money to pay back the loans that the shareholders made then their basis is returned to them and you don't need to enter the zero dollar sale transaction.

If the S-corp didn't have the money to repay to the shareholders then the sale would be entered to show a loss of the amount that was not repaid.

@Jady1952 

[jlondon11]

Loan was to sub s that was dissolved in July 24 2024.  Final return was submitted Nov. 2024, but K-1 does not reflect capital losses of stk or loan basis , approx $56k  I am the only shareholder.  I don't think I can fix this on my personal return, but with staffing at the I. R. S reduced and the corporation effectively dissolved, not sure how best to amend the return without opening up, Pandora's box..  what is the best course of action to claim the long term capital loss.  The company was not sold it was insolvent.

[Rick19744 · Accepted solution]

A few comments:

• Essentially unpaid shareholder loans would be converted to capital contribution.
• Don't need to amend the final 1120-S.
• As a shareholder in a pass-through entity, you should be maintaining your tax basis in the S corporation.
• Now that you have received the final K-1, you should enter the appropriate K-1 boxes into TT.
• You should also update your tax basis schedule for all applicable K-1 items EXCEPT for any distributions on the final K-1.
• Also update the tax basis schedule for any loans that have not been reflected as capital contributions.
• When you come to the questions related to "disposing" of the entity you should answer "yes" and complete disposition.
• TT will then ask for the cost basis (which is your updated tax basis) and the "selling price" will be any distributions detailed on the K-1 box 16 Code D.
• This information will be transferred to form 8949 and Schedule D
• You also need to complete form 7203

[jlondon11]

The filed K-1 shows no long term capital loss.  Can I modify basis on personal achedule D even though K- 1 shows no figure for capital loss and nothing in box 16.  The only number on k1 is operating loss and outstanding loan balance. No schedule D. I have kept track of my basis but accountant who prepared final return did not notice stock basis associated with depreciation recaptureand did not think loan loss  would be considered capital loss.  Over the years, we lost about $80000 in equity on properties purchased in 2006 and 2007. Properties sold for less than we had invested. The loans were provided in the interim to cover repairs and payoff bank loans.  

[RobertB4444]

Yes.  Modify the basis on your personal return to reflect what it actually was so that the return of those loans to you is not treated as taxable income.

@jlondon11