Basis in a S Corp


V

Vijay Sharma

If I have a basis of $10,000 as a sole owner in an S Corp
and I sell my 50% share for $30,000, what would the entries
(accounts and amounts) on the books be?

In essence, it seems that I am selling $5,000 of shares (50%
of $10,000) for $30,000. Is this a Capital Gain of $25,000?
Does this Capital Gain go to Form 1120S (lines 7 or 8 on
Schedules K and K-1s ) or does it go to my personal Schedule
D of Form 1040 only, bypassing any reporting on Form 1120S,
K and K-1s?

Is my new basis $5,000? What is the purchaser's basis? Is
it $30,000? Is it possible to have equal owners (50% each)
with different basis ($5,000 for me and $30,000 for him)?

Any help will be highly appreciated.
 
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Paul Thomas

Vijay Sharma said:
If I have a basis of $10,000 as a sole owner in an S Corp
and I sell my 50% share for $30,000, what would the entries
(accounts and amounts) on the books be?
The books wouldn't have any financial accounting adjustments.
There would need to be some recording in the stock ledger
though.

What you are doing is selling ~your~ shares. The company is no
more a part of that transaction than you selling your Microsoft
stock on the market.

You'll have a gain or loss on the sale individually, based on
the sales price, less your basis in those shares sold.

$30,000 - $5,000 = $25,000 gain. Taxed to you personally.
Unless you need the cash, personally, have the company issue
more shares equal to the number of shares you own (then you'd
be 50% owner) and the company has no tax obligation for that
cash infusion.

Talk to both an accountant AND an attorney in your area to be
sure you are in compliance with all regulatory laws.
 
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S

Seth Breidbart

$30,000 - $5,000 = $25,000 gain. Taxed to you personally.
Unless you need the cash, personally, have the company issue
more shares equal to the number of shares you own (then you'd
be 50% owner) and the company has no tax obligation for that
cash infusion.
But then the company, of which he owns 50%, would have the
$30,000, making his portion only $15,000. To be fair, the
buyer should pay $60,000 to the company for half (assuming
the company was originally worth $30,000 for half, it was
worth $60,000 for all, so now with an additional $60,000 in
cash it's worth $120,000).

Then the company could pay a return of capital dividend of
$60,000 ($30,000 each); the seller would reduce his basis to
$0, and only $20,000 would be taxable, while the buyer's
basis is reduced to $30,000 with nothing taxable. (In fact,
that $30,000 could be in the form of a note, so the buyer
doesn't have to have the cash for the short time the
transactions would take.)
Talk to both an accountant AND an attorney in your area to be
sure you are in compliance with all regulatory laws.
Definitely; I have no idea whether my method would actually
work, or have the results I suggested.

Seth
 
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L

LoTax

The books wouldn't have any financial accounting adjustments.
There would need to be some recording in the stock ledger
though.

What you are doing is selling ~your~ shares. The company is no
more a part of that transaction than you selling your Microsoft
stock on the market.

You'll have a gain or loss on the sale individually, based on
the sales price, less your basis in those shares sold.

$30,000 - $5,000 = $25,000 gain. Taxed to you personally.
Unless you need the cash, personally, have the company issue
more shares equal to the number of shares you own (then you'd
be 50% owner) and the company has no tax obligation for that
cash infusion.

Talk to both an accountant AND an attorney in your area to be
sure you are in compliance with all regulatory laws.
Seems to me that the second proposal - the purchaser pays
the corporation and the corporation issues shares diluting
the ownership to 50/50 - is *not* the same transaction as
the first one. If I'm the seller, I want all the money in
my pocket, not in the corporation where it's shared with the
purchaser...!
 
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