Reconciling 1099-DIV with K1 earnings for completion of business tax return.

[ryanbnielson]

I have posted operating losses for my business since inception in 2014. All loss was at-risk because I was the 100% owner. I did not use any debt, but paid for losses myself. In 2016, I dissolved/liquidate the business. Assets were sold at market value and then the cash was distributed to me as the sole shareholder. I had previously maintained a positive balance in my business account even though the business was operating at a loss. Consequently, the amount that was transferred out of the business bank account during dissolution was slightly greater than the operating income reported for the year (liquidation + balance + net income for remaining months of operation). When I prepare my 1099-DIV, should the value of the distribution match the earnings for the year? This would essentially balance the stock account and reflect 0 gains. Intuitively, this seems to be correct since all assets were sold at fair market value. The alternative would be to report the full bank account balance as the distributed liquidation dividend.

[Rick19744]

What type of entity is this?  S corporation?  Partnership?  LLC taxed as a partnership?

[ryanbnielson]

S corporation

[Rick19744 · Accepted solution]

I have the following comments:

• Just because you were the 100% owner does not guarantee that all losses are at-risk.
• Your comment that you "paid for the losses" indicates to me that you contributed capital to the S corporation.
• A liquidating distribution from an S corporation is reported on form 1099-DIV.  The amount reported in boxes 8 and / or 9 will be FMV.  Your facts indicate that all assets were sold and you are only distributing out cash.  The amount of actual cash distributed will be reported in box 8.
• The amount reported on the 1099-DIV as a cash distribution will not be reflected on your 1120S; not on Sch K, your K-1 or in the AAA.
• As an S corporation shareholder you should have been maintaining a basis schedule of your investment in the S corporation.  This basis schedule is very important as this will now determine your overall gain or loss on this investment.
• You should complete the 1120S as you would normally.  Make sure the return is marked final.  Update your basis schedule for this final K-1.
• Once your basis schedule is updated for the final K-1, you now compare your liquidating distribution to your basis.  If after adjusting the basis schedule for the liquidating distribution you have basis remaining, then you have a capital loss for the remaining basis.  If after adjusting for the liquidating distribution your basis goes below zero (negative), you have a capital gain for this "negative" amount which essentially places your basis back to zero.

[ryanbnielson]

Thank you.

- I should rephrase and say that I contributed capital to the S corporation in excess of the losses. All capital contributed was 100% at-risk. No debt was contributed.
- Doesn't the 1099-DIV amount get reported on the K1 as an item impacting basis?
- Should I be reporting the final basis anywhere on the K1 or 1120S? Does the capital gain/loss get reported on these forms?

[Rick19744]

Follow-up 1 - makes more sense and I agree.
Follow-up 2 - no.  Basis is an individual shareholder matter.  If you think about it, your K-1's never reflected any capital contributed in the past.  So there are some items that impact basis and are not reflected on the K-1.
Follow-up 3 - Technically the instructions to form 1040 Schedule E page E9 states to attach a basis schedule to your tax return to support any losses taken.  I have never done this and if the IRS wants it then they can ask for detail.  Your final capital gain / loss does not get reported on the 1120S as it is an individual gain or loss not an entity gain or loss.  Your final gain or loss as determined from your basis schedule, will be reported on Schedule D and the applicable form 8949.