USA N/P in dissolved S-corp?


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looking for the proper treatment of a shareholder note payable. The Scorp was dissolved on 10/31 but the balance sheet still shows a liability for a few thousand dollars to the shareholder. Husband and wife are the only shareholders.

Should the note be debited and equity account credited, essentially offsetting the distributions for the assets?

Is it considered bad debt? What process would I go through to determine that?

The shareholders have equity, while I don't want to report this N/P incorrectly I also don't want to over think it.

Thanks!
 
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Stephen Gsell

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Loans from the S corporation to shareholders are corporate assets. Before dissolving the corporation, these loans need to be recovered so that creditors can be paid and distributions made. If there are mitigating circumstances (such as the shareholder with the loan filing for bankruptcy); the corporation may forgive the loan as bad debt. Since S corporations typically pass corporate profits and losses through to their shareholders, the shareholders will have to report the loan as ordinary income. If the loan is recharacterized as a distribution and the shareholder doesn't have sufficient tax basis in his stock, then a taxable capital gain will result.
 
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I think he is saying the situation is the other way around - the corporation owes money to the shareholders.

First all assets should be liquidated. Then the cash should be used to pay off the creditors. Only what is remaining after that should be distributed to the shareholders.

The note should be debited and cash credited. The equity will be whatever remains after all assets are liquidated and all creditors repaid.

Consult a CPA for more accurate/thorough advice.
 

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