S-Corp gift to shareholder

[Paul B.]

For all practical purposes I'm winding down my S-Corp, but
will keep its shell afloat for a while.

This year I reregistered the corporate van in my own name. I
think the way to deal with this is to consider it a
distribution (~$9000) and log it onto Form K-1 (I'm the only
shareholder). I would then subtract it's value from the
corporate AAA at Form 1120S, Schedule M2, and have to report
it as income on my 1040.

Am I in the ball park on this? If so, where on K-1 does the
distribution get written up?

Thanks much!

Paul

 

[Thomas Healy]

For all practical purposes I'm winding down my S-Corp, but
will keep its shell afloat for a while.

This year I reregistered the corporate van in my own name. I
think the way to deal with this is to consider it a
distribution (~$9000) and log it onto Form K-1 (I'm the only
shareholder). I would then subtract it's value from the
corporate AAA at Form 1120S, Schedule M2, and have to report
it as income on my 1040.

Am I in the ball park on this? If so, where on K-1 does the
distribution get written up?

Actually, the distribution gets made at the fair market
value of the van. That will generate either a gain or loss
on the corporate return. If it is a loss it's not allowable
(a Schedule M-1 adjustment). The gain will be included on
Schedule K-1. The distribution itself doesn't create taxable
income to you.

 

[David Woods, EA, ChFC, CLU]

For all practical purposes I'm winding down my S-Corp, but
will keep its shell afloat for a while.

This year I reregistered the corporate van in my own name. I
think the way to deal with this is to consider it a
distribution (~$9000) and log it onto Form K-1 (I'm the only
shareholder). I would then subtract it's value from the
corporate AAA at Form 1120S, Schedule M2, and have to report
it as income on my 1040.

Am I in the ball park on this?

Eh. Ahh. Not quite. You need to report the distribution
as a gain based on a sale at FMV. The FMV is your
distribution. The gain is a corporate gain which ultimately
is yours anyway. The FMV is the AAA deduction.

If so, where on K-1 does the
distribution get written up?

On the line that says Distribution to Shareholder.

 

[David Woods, EA, ChFC, CLU]

Actually, the distribution gets made at the fair market
value of the van. That will generate either a gain or loss
on the corporate return. If it is a loss it's not allowable
(a Schedule M-1 adjustment). The gain will be included on
Schedule K-1. The distribution itself doesn't create taxable
income to you.

This is REALLY picking a nit, but if his stock basis is less
than the value of the van, the difference is a cap gain.

 

[Paul B.]

Eh. Ahh. Not quite. You need to report the distribution
as a gain based on a sale at FMV. The FMV is your
distribution. The gain is a corporate gain which ultimately
is yours anyway. The FMV is the AAA deduction.

Ok, if I read you correctly, the only difference is I have
to record the value of the van as a gain for the
corporation.

On the line that says Distribution to Shareholder.

Sorry to be dense, but I see no such line. Perhaps it is
line 10, Other Income?

Paul

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[Paul B.]

Actually, the distribution gets made at the fair market
value of the van. That will generate either a gain or loss
on the corporate return. If it is a loss it's not allowable
(a Schedule M-1 adjustment). The gain will be included on
Schedule K-1. The distribution itself doesn't create taxable
income to you.

Sorry, but why wouldn't the distribution count as personal
income? I would think it would.

Paul

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[Lanny Williams]

Sorry, but why wouldn't the distribution count as personal
income? I would think it would.

Distributions from S Corps are very seldom income to the
shareholder. Each shareholder must report his/her share of
the various income items recorded by the corporation.
Whether or not these pass through items are distributed to
the shareholder or not does not affect the taxability. (In
rare cases, such as distributions in excess of basis, this
is not true but these cases are the exception.)

So, in this case, the corporation recognized gain on the
disposition of the van. This gain is passed on to the
shareholders on Schedule K-1 to be reported on their 1040s.

Lanny K. Williams, CPA
Nawarat, Williams & Co., Ltd.
Income Tax Services for Expatriate Americans

 

[Harlan Lunsford]

Thomas Healy wrote:
snipped.....

Sorry, but why wouldn't the distribution count as personal
income? I would think it would.

Well, if it generates a gain on the corporate return, and
if this is an 1120S return,..... the income should just
flow right on through without having to appear on a K-1;
right?

So, it all comes out in the wash. I use that expression,
because the case I have in which owner may transfer is big
old truck to himself from S corp this year just happens to
be engaged in the laundry business.

ChEAr$,
Harlan Lunsford, EA n LA

 

[David Woods, EA, ChFC, CLU]

Ok, if I read you correctly, the only difference is I have
to record the value of the van as a gain for the
corporation.

No the DIFFERENCE between the value of the van and its basis
is gain.

Sorry to be dense, but I see no such line. Perhaps it is
line 10, Other Income?

Look again. I don't know the line number, but it's very
clear. Distributions of Cash or Other Property to
Shareholder or something very similar.

 

[David Woods, EA, ChFC, CLU]

Sorry, but why wouldn't the distribution count as personal
income? I would think it would.

Because s-corp distributions don't normally generate
personal income?

 

[Arthur L. Rubin]

So, it all comes out in the wash. I use that expression,
because the case I have in which owner may transfer is big
old truck to himself from S corp this year just happens to
be engaged in the laundry business.

And I though you were referring to the wash sales rule....

 

[Paul B.]

No the DIFFERENCE between the value of the van and its basis
is gain.

Actually, let me back up on this. I really don't understand
what's going on. Let me make clear that I transferred title of
the van to my person, but paid the corp. nothing. So I don't
understand how this is a gain for the corp.

Sorry for being so dense. Please, anyone chime in.

Look again. I don't know the line number, but it's very
clear. Distributions of Cash or Other Property to
Shareholder or something very similar.

The form (now redesigned - not sure if that's a factor)
lists no distributions on its face. But the back of it shows
property distributions should be entered on line 16, "Items
affecting shareholder basis" - whatever that is. :/

Paul

 

[Paul B.]

Distributions from S Corps are very seldom income to the
shareholder. Each shareholder must report his/her share of
the various income items recorded by the corporation.
Whether or not these pass through items are distributed to
the shareholder or not does not affect the taxability. (In
rare cases, such as distributions in excess of basis, this
is not true but these cases are the exception.)

So, in this case, the corporation recognized gain on the
disposition of the van. This gain is passed on to the
shareholders on Schedule K-1 to be reported on their 1040s.

Actually I paid the corp nothing for the van, perhaps I
didn't make that clear enough in the initial post. Sorry to
say I'm more baffled than ever. Thanks for your input.

Paul

 

[David Woods, EA, ChFC, CLU]

Actually, let me back up on this. I really don't understand
what's going on. Let me make clear that I transferred title of
the van to my person, but paid the corp. nothing. So I don't
understand how this is a gain for the corp.

Sorry for being so dense. Please, anyone chime in.

The form (now redesigned - not sure if that's a factor)
lists no distributions on its face. But the back of it shows
property distributions should be entered on line 16, "Items
affecting shareholder basis" - whatever that is. :/

You are correct. I had forgotten about the redesigned form.

 

[Katie]

Actually, let me back up on this. I really don't understand
what's going on. Let me make clear that I transferred title of
the van to my person, but paid the corp. nothing. So I don't
understand how this is a gain for the corp.

Sorry for being so dense. Please, anyone chime in.

Let me see if I can help you understand this.

First, corporations do not make "gifts" to their
stockholders. They make distributions, which generally are
characterized as dividends. If a corporation distributes
property to a stockholder, the corporation is required to
recognize gain to the extent of the excess of the fair
market value of the distributed property over its tax basis
in the hands of the corporation. This requirement is in IRC
Sec. 311 and applies to all corporations, S and C.

If the corporation was a regular corporation, which we refer
to as Subchapter C or C corporation, the stockholder would
have dividend income in the amount of the fair market value
of the distributed property. So there would be two levels
of tax related to that item of property: gain recognized at
the corporate level, and a dividend recognized by the
stockholder.

Since your corporation is a Subchapter S corporation, there
is no dividend involved. Instead, the corporation's income
and deductions flow through to your individual income tax
return, without regard to whether or not you actually
receive anything from the corporation. You must take the
Sec. 311 corporate level gain on the distribution into your
income subject to individual income tax. As a result, the
transfer of the van to you is taxed only once. That's the
benefit of the Subchapter S election.

Does that help?

Katie in San Diego

The foregoing is intended for educational purposes only and
does not constitute legal or professional advice.

 

[Paul B.]

Let me see if I can help you understand this.

First, corporations do not make "gifts" to their
stockholders. They make distributions, which generally are
characterized as dividends. If a corporation distributes
property to a stockholder, the corporation is required to
recognize gain to the extent of the excess of the fair
market value of the distributed property over its tax basis
in the hands of the corporation. This requirement is in IRC
Sec. 311 and applies to all corporations, S and C.

If the corporation was a regular corporation, which we refer
to as Subchapter C or C corporation, the stockholder would
have dividend income in the amount of the fair market value
of the distributed property. So there would be two levels
of tax related to that item of property: gain recognized at
the corporate level, and a dividend recognized by the
stockholder.

Since your corporation is a Subchapter S corporation, there
is no dividend involved. Instead, the corporation's income
and deductions flow through to your individual income tax
return, without regard to whether or not you actually
receive anything from the corporation. You must take the
Sec. 311 corporate level gain on the distribution into your
income subject to individual income tax. As a result, the
transfer of the van to you is taxed only once. That's the
benefit of the Subchapter S election.

Does that help?

Yes, that helps very much, Katie. Thank you greatly!

Paul