Discussion:Closing an S Corp - Losses - Final Return
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| 27 September 2006 | |
| Hi everyone - I hope someone can help me!
Facts: - S Corp with sole shareholder - Opened business (a deli) in August 2004 - Closed business as of 12/31/05 - In December 2005, prior to closing doors, sold remaining perishable inventory at a big discount - Sold all equipment that was being depreciated - Had leashold improvements and organization costs not completely depreciated/amortized - Has negative retained earnings due to loss at 12/31/04 - Shareholder has loans to S Corp that will not be paid back to shareholder (no cash) Issues: 1. Leasehold improvements not completely depreciated - Can I go ahead and expense remaining amount through depreciation in 2005? If so, do I just show it as sold at a zero sales price? 2. Same for unamortized organization costs - Override tax program to take remaining unamortized costs? 3. Shareholder loans to the S Corp that will not be repaid - Can shareholder take these unpaid loans as a loss on his 1040? Is it ordinary or capital loss? If ordinary, is it shown on the K-1 to flow through to the shareholder's 1040 on Schedule E? If capital, how is it shown on the Schedule D? 4. Since the balance sheet on the 1120S must be zeroed out at 12/31/05, how do I present the negative retained earnings and the shareholder loans on the M1/M2? I know this is alot to take in, but I have searched the world over and have not been able to find any guidance on these particular issues. Any help with any of them would be really appreciated! THANK YOU!!!!!! | |
| 27 September 2006 | |
| Once you close and establish a final return the balance sheet should be ZERO out. The M-1 in your case should be showing a loss. Your M-2 should be your beg balance then on line 3 " Other Additions " attach a statement showing "ADJUSTMENT TO R/E UPON LIQUIDATION OF CORPORATION" AND line 4 should show the loss if any form line 21 from page 1 of form 1120-s.
On the shareholder's personal income taxes form 1040 you will report the loss from the K-1 on schedule "E" , the adjustment to R/E I would report to form 4797 on part one which then will flow to page one of 1040 other gains and losses. ( I'm assuming that the shareholders have basis and if the first year the Company had losses you must adjust the calculation in the year that you are dissolving the company . ( in this case on from 4797 part one letter F.) If someonelse has better advise please do so. | |
| 27 September 2006 | |
| Hi 1) yes 2) yes 3) loss should come through on k-1 for 2005/2056 as ordinary and generally should reduce loan/capital stock balance to zero basis. There should be no further write off of loan balance on 1040. Final B/S can show loan and stock balance offset by negative R/E or show all zeros. I do not flow any adjustment through m-2 for "R/E upon liquidation" or loan balances . bye | |
| 27 September 2006 | |
| Thank you Mauro and WesR. I really appreciate your input.
WesR: Your answer makes perfect sense to me. Thank you so much!!! | |
| 29 January 2009 | |
| Does this apply also to a Schedule C? How do you report it on the return (if I indicate it on the Asset wksht as disposed of with 0 sale price it transfers the remaining depreciation as a loss to 4797 and that should not be right.) Client also has some other SE income that I would like this expense to go against. Thanks. | |
