Discussion:S Corp Short Year
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Discussion Forum Index --> Advanced Tax Questions --> S Corp Short Year
Discussion Forum Index --> Tax Questions --> S Corp Short Year
| 6 March 2008 | |
| I am preparing two short years for an S Corp. My question is in regard to the first short year which happens to be Jan 1 2007 thru May 31 2007. I have a copy of the Stock Redemption Agreement and there are financial statements attached which consist of a Quickbooks printout of the balance sheet and profit and loss with penciled corrections made to some of the balances. The problem is that the payroll expense includes $28,000 of distributions. I'm not sure how to handle this with regard to reporting compensation of officers, salaries and wages and payroll taxes on the tax return. I thought I would just make all of my adjustment on the December 31 year end short year but didn't know what any of you would advise that I do.
Thanks! | |
RoyDaleOne (talk|edits) said: | 6 March 2008 |
| Distributions are distributions not a deduction, or officer compensation and therefore are not deeductible.
I guess your are trying to account for a change in the stockholders by actually closing the books and not by weighted stock ownership. If that is the case you have to close the books at May 31, and again at Dec 31. May closing only has activity up to May 31. The December closing has activity from June 1 to Dec 31 therefore you can not make all the adjustments as of Dec 31. | |
| 6 March 2008 | |
| That's what I was thinking too. I guess I will need to inform the shareholder that we will not be able to close the books on May 31st since they are inaccuarate despite the fact that they were the one's used for the Stock Redemption Agreement. I just obtained this client a few months ago. | |
| 6 March 2008 | |
| Can't you just "reclose" the books as of May 31 and get the correct numbers? Who says you have to use the numbers provided by the client? (How often are the client's numbers correctin thefirst place?) | |
| 6 March 2008 | |
| All affected shareholders must consent to the "closing of the books" method. Otherwise you must use the weighted average ownership times the full year net income.
If they make the proper election, then you do two separate accountings so to speak, but still only one tax return. You report the total income and expenses for the year, and then you do a special allocation on the K-1s. | |
| 6 March 2008 | |
| I already talked to the client and said we would do the weighted average method since the balances per May 31st were incorrect. He seemed okay with that. I guess one of my reasons is that they already computed his half of the equity based on that information so I just thought it would be easier to go that route.
Thanks for your imput and let me know if you have any other thoughts on this you would like to share. | |
| March 6, 2008 | |
| Well, I hate that method unless profits are pretty consistently earned. Otherwise, someone's getting screwed. Suppose at 5/31, they'd earned 50k, 25 to each. At year end, they earned 150k. Allocating the 150k puts 31.25k to him instead. So the guy who remains gives the old guy more money for no reason. | |
| March 6, 2008 | |
| And it's worse if profits are less, since the old guy gets less than he was entitled to when he left. It just is never a good idea to do that way. | |
| 8 March 2008 | |
| My situation: Client had 7 shareholders. 3 decided to leave on May 1, and their shares were redeemed for $700,000. Income to that point was just $40,000. Low stock basis, so they were expecting lots of capital gain on their stock sale, and a small K-1 ordinary income allocation. After the shake-up, the remaining 4 sold the business in October for $2.5M. The company recognized almost all of it as ordinary income for receivables and depreciation recapture. The settlement with the departed shareholders did not require a closing of the books election, and now any shareholder can effectively veto that by withholding his consent. So we're using the weighted average method. That allocates lots of ordinary gain back to the 3 who left. At first blush it doesn't seem right, however I've come to see that this is economically reasonable. What the departed shareholders really sold was their interest in receivables and equipment, which are ordinary income. Nobody is getting screwed. They report more ordinary income, which raises their basis. So it doesn't change their overall gain, it just changes the character of their gain. | |
| 8 March 2008 | |
| Another question I have regarding this issue is in reference to booking the journal entry for the buyout. The amount that was paid to the former shareholder by the corporation is of course 50% of all of the equity accounts and net income as of 5/31. The money is being paid by the corporation to the former shareholder over a period of 2 1/2 years. Am I correct in booking the redemption as a debit to treasury stock and then credit the note for the principal amount of the note? | |
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