Discussion:Sale of S corp assets and shareholder has outside basis
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Discussion Forum Index --> Advanced Tax Questions --> Sale of S corp assets and shareholder has outside basis
Discussion Forum Index --> Tax Questions --> Sale of S corp assets and shareholder has outside basis
| 27 August 2008 | |
| S corp is selling its assets and has a gain of $700,000. The shareholder bought out his partner 2 years ago for $400,000 and now has 100% of the stock. I assume this is his outside basis in the stock. How does he report the sale and get credit for the 400,000 he paid for the other 50% of stock, since this is not reflected on the books of the s-corp. Any help would be much appreciated. Does the s-corp redeem his stock and he reports it on schedule d?
Scott | |
| 27 August 2008 | |
| There is no such thing as 754 adjustment for an S corporation. Thus, you are stuck with reporting the gain on inside basis. However, when the corporation liquidates, the shareholder will be able to reduce his liquidation gain or increase his liquidation loss by the $400,000. | |
| 27 August 2008 | |
| What form does he report this? on what form, does it role through the 1120s or on his 1040 schedule d? Thanks for your help
Scott | |
| 27 August 2008 | |
| Report any liquidation gain on Form 1040, Schedule D. Do not report this on the 1120S. | |
| August 28, 2008 | |
| The corps' gains on the K1 and the s/h's loss will net out on the D, basically. | |
| 28 August 2008 | |
| So the 700,000 gain passes through on the k-1's? and I then show the sale of his stock on schedule D to net out the 700,000 gain? Since part of his gain is ordinary gain due to depreciation recapture he is not able to then net out his whole 400,000 in his outside stock basis. This is basically what I have ordinary gain 500,000 due to depr recapture capital gain 200,000 total gain 700,000. His outside stock basis is 400,000. If I report it this way he is unable to wash out the total gain be cause it is not all capital. Is there anyway to wash out the whole thing? I am assuming section 197 property is also subject to depr recapture. He sold a liquor license that was fully amortized so i have to pick up recapture on that correct? You guys have been very helpful thanks for your help. | |
| August 28, 2008 | |
| I almost mentioned the dep. recapture issue, got caught by that myself last year on my big deal...figured you'd have mentioned it tho'. Yeah, it really sucks, the capital loss limit won't offset the gain. | |
| August 28, 2008 | |
| Well, that doesn't solve it, Kev. The problem is that recap of deprec. comes on the 4797 and will NOT offset the Sch. D loss, which will be limited to $3k. So unless the other part of the gain is big enough to cover the loss on the stock sale, it's a hoser. | |
| August 28, 2008 | |
| And I should add that doing it all in the same year creates another problem if there's an installment note, since ALL the usually deferred gains/taxes are accelerated in that case. | |
| 28 August 2008 | |
| JR, I think it depends on how much is 1231 gain vs how much is 1245 recapture.
the 1231 gain can offset the Sch D loss | |
| 28 August 2008 | |
| outside stock basis = 400k,
add passthrough gain 700k subtract liquidating distribution 700k basis after distribution = 400k this loss should offset 400k of the 700k gain net 300k gain which is §1250 unrecaptured gain | |
| 28 August 2008 | |
| actual numbers will be different because shareholder will also have some basis in original 50% stock, and will also have other assets/cash distributed above 'gain'. | |
| 28 August 2008 | |
| that 4797 §1250 500k flows from 4797 to Sch D anyways, though, so I still don't see a problem if liquidation occurs same tax year as sale of assets producing gain
| |
| 28 August 2008 | |
| The problem here may one of (incorrect) terminology. Taxdr1965 mentioned depreciation "recapture." If that's the case then, yes, the gain will not flow through to Sch D but will be taxed as ordinary income. However, if Taxdr1965 means "unrecaptured 1250 gain," then Kevin is correct and there is no problem. | |
| 2 September 2008 | |
| Thanks for the help. This is a summary of the transaction. I think Leasehold Improv would be 1250 and the Liquor License would be 1245?
Shareholder bought out old partner for $400,000 2 years ago. We are treating this as outside basis since it is not recorded on the s-corp tax return. Corp then sells its assets listed below equipment-sale price $210,000 Section 1245 Original cost $466,944 Depr $463,823 Adj Basis $ 3,121 Net Gain $206,879 Leasehold Improv sale price $200,000 Section 1250? Original Cost $108,625 Depr $ 25,066 Adj Basis $ 83,559 Net Gain $116,441 Goodwill-Sale Price $110,000 All Capital Gains Original Cost $0 Net Gain $110,000 Liquor License Sale price $350,000 Section 1245 subject to depr recpature?not sure Original cost $167,500 Depr $100,496 Adj Basis $67,004 Net Gain $282,996 Total Sale price $870,000 Down payment $500,000 Note $370,000 Are these assets considered 1245 assets subject to depr recapture and reported on section 3 of the 4797? Or are they section 1231 assets reported in section 1 of the 4797 His total gain is $716,316 Outside Basis $400,000 Net Gain $316,316 Is this Capital Gain or ordinary income. He only got $500,000 down and is collecting the $370,000 on a note for 10 years, so I have an installment sale. When I calculate it it seems to be all 1245 property with the gain taxed as ordinary income due to depreciation recapture and all of it is taxable immediately. I guess i am confused between if he gets 1231 treament or is he subject to 1245 treatment and how do I show his outside basis on his return? | |
