S Corporation Stock Sales: Mastering Tax Reporting, Income/Loss Allocation and Section 1377 Elections

Utilizing "Close-the-Book" Strategies, Determining Year-End Basis Adjustments, Preparing Form 1120-S

Recording of a 110-minute CPE webinar with Q&A


Conducted on Wednesday, February 15, 2017
Recorded event now available


This webinar will provide tax advisers with a comprehensive and practical guide to reporting sales of S Corporation stock in non-liquidating transactions. The panel will discuss income and loss allocation in cases of a mid-year sale, describe available elections and consent requirements for shareholders, detail when an S Corp can or must close its books under the guidance found in Section 1368, and review the treatment of accrual-basis S corporations involved in stock sales.

Description

When an S corporation stockholder sells an entire interest in an S corporation’s stock, the transaction can present significant tax reporting challenges and often undesirable tax results. S corp tax advisers need to know the various elections and provisions to mitigate the impact of income/loss allocations in the year a shareholder sells his interest in a transaction that does not liquidate the corporation.

The general S corporation rules require that income or loss must be allocated on a per-share/per-day basis among all shareholders. However, this can create inequitable tax results, particularly when the exiting shareholder sells the interest to existing shareholders.

Section 1377 provides election options to remedy potential tax issues arising from a shareholder’s sale of his interests. An S corporation may, with the consent of all shareholders, elect to “close the books” as of the date of the sale transaction for purposes of allocating income or loss to an exiting shareholder to avoid negative tax consequences.

This closing of the books election requires specific allocation and reporting calculations, and often involves year-end basis allocations to the purchasing shareholder. A thorough understanding of the Section 1377 election rules will enable tax advisers to S corporations and their shareholders to help avoid costly tax consequences.

Listen as our experienced panel provides a practical guide to the election and allocation tax challenges of reporting a shareholder’s sale of S corporation interests.

Outline

  1. General rules for income allocation on sale of S corporation stock
  2. “Closing of the Books” election under Section 1377
  3. Tax reporting after a Section 1377 election
  4. Year-end basis adjustments in the year an S corporation shareholder sells stock

Benefits

The panel will discuss these and other important topics:

  • What are the specific income/loss allocation issues that apply when an S Corporation shareholder sells his entire interest to other current shareholders?
  • What are the mechanics of making a “closing of the books” election under Section 1377?
  • Filing a Form 1120-S Tax Return after the S corporation has made a Section 1377 election
  • What basis adjustments must the S corporation make to shareholders at year-end after a Section 1377 closed taxable year election?

Learning Objectives

After completing this course, you will be able to:

  • Recognize scenarios in which an S corporation shareholder’s mid-year sale of stock interests creates inequitable or unfavorable tax consequences
  • Identify available elections under Section 1377 to change allocation of income/loss in the year of sale of a shareholder’s S corporation stock
  • Determine necessary year-end basis adjustments for buyer and remainder S corp shareholders in the year an exiting shareholder divests his S corp interests
  • Discern when a “closing of the books” election is the optimal tax strategy for S corp shareholders
  • Verify the tax reporting requirements for S corporations in the year a shareholder has sold his interests and the corporation makes a 1377 election

Faculty

Brian T. Lovett, CPA, JD, Partner
WithumSmith+Brown, New Brunswick, N.J.

Mr. Lovett has extensive experience serving the tax needs of both public companies and closely-held businesses, including all aspects of tax compliance for partnerships and corporations. He advises clients with regard to the structure and tax consequences of new business ventures, and assists with restructuring existing businesses for increased tax efficiency. Prior to joining his firm, he was with a “Big 4” accounting firm, working closely with large, multinational real estate investment companies.

Robert W. Jamison, CPA, Professor Emeritus of Accounting
Indiana University, Kelley School of Business, Indianapolis

Mr. Jamison is Professor Emeritus of Accounting at Indiana University, Purdue University, Indianapolis (IUPUI). His principal area of specialization is S Corporations. He is the sole author of S Corporation Taxation, and co-author of Multistate Tax Guide to Pass-Through Entities, both of which are published annually by CCH, a Wolters Kluwer business. He is a regular contributor to Land Grant University Tax Education Foundation, Inc. National Income Tax Workbook and has contributed to Federal Tax Workshop. He presents advanced and update S Corporation seminars for various states' CPA societies and to other professional organizations. He is a member of the AICPA S Corporation Technical Resource Panel. He consults on S corporation and other business entity problems and has secured letter rulings from the IRS.  


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