We are selling our whole S corp as stock sale in the mid year How do we prepare a tax return? Is it partial year return for ourselves, and new owners will file their?

[Anonymous_]

I will page @Rick19744 for this (if he is around) as this scenario can be quite complex and you may need to seek guidance from a local tax professional in any event.

You need to calculate your individual tax basis in the corporation, but you do not need to file a "partial year return" for yourselves as individuals (i.e., you do not need to file a 1040 for 2023 until next year). 

[Mike9241]

first you need your stock basis which you should be able to get from the 7203 you filed for 2022.  then in 2023 there will be a proration of the income/loss between you and the new stock owner.  your share of 2023 income/loss deductions and distributions will determine you basis on the date of sale.  since it would seem you have held the stock long-term you would report the sale on schedule D. type F proceeds and tax basis not reported to the IRS. your capital  gain/loss is the difference between the sales price and your tax basis.  selling the stock and not the assets avoids the messier situation of depreciation recapture (ordinary income) and filing certain other forms. 

this is with some caveats  - depending on the date of sale the new owner may be able to revoke the S election effective with the start of the current tax year. sale to a related party at a loss would bar deduction of the loss.

  However, if the S corporation was formerly a C corporation and is within the five-year built-in gains (BIG) tax recognition period, a sale of assets by the S corporation could trigger corporate-level BIG tax (Sec. 1374).

[Rick19744]

To add a few comments:

• The facts presented are very limited, with a number of questions that should be addressed.  As a result, I would recommend you consult with a tax professional where you can have a one on one to address important issues that may impact your tax implications.
• But at a high level, the S corp may or may not continue in existence.  This is obviously one of the facts that is not known; who the buyer was.  The buyer may be an ineligible shareholder.
• If the buyer was an eligible S corporation shareholder, you (the seller) will be considered to have owned the stock through the date of sale.
• If the S corporation continues, the shareholder's need to determine how the partial year allocation will be handled:
  • The default is that pass-through items are allocated on a per-share per-day rule.  
  • All affected shareholders who own stock during the year can elect to essentially close the books on the date of sale and the allocation will be based on that split period (specific accounting method).
  • This is a very important decision and should be documented as part of the sales agreement, along with any required specific election included with the tax return.
• And to repeat what has been mentioned, you hopefully know your tax basis in the S corporation stock.  Your gain, will be the difference between the selling price and your tax basis.
• If the purchase price is paid out in more than one year, you will have an installment sale, along with those reporting requirements.

[elanazlatkin]

I was not clear, I meant  partial corporate tax return for seller (ourselves)

[elanazlatkin]

We are selling stock, the new owners want to continue business without interruptions. We get our money at closing.

However, my concern how the corp 1120s tax return should be prepared? Who is responsible for prep? Do I close books as of April 30, and buyers start from scratch with my ending balance sheet?

Do we prepare one tax return with k-1s based on sale date, or I can do ours for 4 months and they will do their own for the rest of the year?

Thanks

[elanazlatkin]

Hi We are selling stock, all existing shareholders are retiring, and the new owners want to continue business without interruptions. We will get agreed money at closing. However, my concern how the corp 1120s tax return should be prepared? Who is responsible for prep? Do I close books as of April 30, and buyers start from scratch with my ending balance sheet? Do we prepare one tax return with all k-1s at the end of the year or based on sale date we can do ours for 4 months and new owners will do their own for the rest of the year? Thanks

[Rick19744]

Follow-up comments:

• Please reread my initial reply bullet number 4.  This addresses the important question regarding the short period(s) for how the income is to be allocated based on a change in shareholder(s) due to a stock acquisition.
• Since the new owners will now have control of the corporation post closing, they will be responsible for preparing the future tax returns; including the return for the year of sale.
• Based on bullet two above, this is why my initial reply indicated that the purchase price agreement should provide how the short period, pre and post purchase, income is to be determined.  This is a key factor in the purchase process of the S corporation stock.
• You will receive a final K-1 after the year end and once the tax return has been prepared by the new owners.