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Subchapter S Corporation CPA discusses Property Distributions | Form1120S Tax Preparation

Subchapter S Corporate CPA discusses proptry distributions.

Proactively planning non-standard transactions in a Subchapter S Corporation is prudent. (910) 399-2705

Subchapter S Corporations are usually have only a few shareholders.  Property often passes from the S Corporation to the shareholders.  Technically cash is property, but let’s make it interesting with a IRS Form 1120-S example utilizing land.  The main point is to consult with your CPA before committing the S Corporation to a non-standard transaction. Things get tricky fast. As in all our examples, we’ll use Subchapter S Corporation CPA, Inc., as our demo S Corporation.  The tax implications of Form 1120-S are stressed below and we assume the transaction makes sense for both Subchapter S Corporation CPA, Inc. and the Shareholder.

Basic Scenario

One Shareholder of Subchapter S Corporation CPA, Inc. wants a piece of corporate owned land.  SSCC  bought the  5 acres of land years ago, as an investment, for $300,000.

Land Worth $250,000 at time of transfer – $50,000 Loss

Generally, distributions of loss property should be avoided in S Corporations, at least from a tax perspective.  Here’s why. Subchapter S Corporation CPA, Inc. doesn’t ever get to take the $50,000 loss on the IRS Form 1120-S.  It can only take a loss if the it sells the land.  But the Shareholder’s basis in the land would have been the $250,000 FMV. So the $50,000 loss on the transfer never benefits the Shareholder either.

Land Worth $350,000 at time of transfer – $50,000 Gain

Essentially the IRS treats this transfer like a sale of the land to the shareholder at FMV. The tax consequences for the land are the same if Subchapter S Corporation CPA, Inc. sells the land to a Shareholder and he/she disposes of it, or SSCC sells it and distributes the cash to Smith.  Assuming it can be sold.  At the time of transfer, the S Corporation recognizes a gain of $50,000.  Form 1120-S allocates this gain to the Shareholder’s basis, through the Form 1120-S Schedule K-1 according to the percentage of Subchapter S Corporation CPA, Inc. they own.  Simultaneously, the shareholder’s basis reduces by the entire $350,000, but not below $0.

“Documenting Fair Market Value (FMV) at the time of  transfer is crucial if the S Corporation or shareholder is audited.”
– Gary Bode S Corporation CPA and Form 1120-S Tax Accountant

Moral of the Story

In S Corporations, the tax consequences of non standard transactions on Form-1120S deserve proactive consideration with your CPA.

I’m a Subchapter S Corporation CPA because my firm operates as an S Corporation. So I devote considerable time, including S Corporation related Continuing Professional Education to stay current on new issues. And our virtual office means we can serve your S Corporation wherever it is. Need a free consult? (910) 399-2705.

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