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?

[Marka81]

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 

[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.

[Marka81]

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!

[Rick19744]

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.

[mmdevost]

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?  

[AliciaP1]

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

[Rick19744]

@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.

[mmdevost]

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?

[Rick19744]

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.  

[mmdevost]

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.

[mmdevost]

Thank you for your advice!!

[Rick19744]

You are welcome.

[Clark2023]

Hello, 

Hoping someone can help me understand since I feel this is in the same topic area as this post. 

I follow completely the need to do a 1099 DIV and how to report it in the personal return but I am having a hard time understanding for what reason this would be causing a gain on the personal return after it is all said and done.   The basis left on 7203  for the S-Corp is less than the liquidating distribution.  

I am guessing there has to be a simple explanation for why this would occur and I am just overthinking this one!

Would appreciate any help offered!  

[RobertB4444]

The gain to the S-Corp is because the transfer is done at the fair market value of the liquidating assets as if they had been sold for that price.  Then the resulting gain is used to offset the shareholder basis.

@Clark2023 

[Clark2023]

Sorry I typed that wrong (edited it now)

There is a gain on the personal return when I report the 1099 DIV and subtract their basis in the SCorporation. 

Sorry!