Hi Everyone,

I have a client who is a sole owner of an S Corp. She has many assets (Equipment and Furniture) and is closing the company. She already filed the paperwork to dissolve with the state but I am unsure about how to handle the assets and loans payable.
She will be filing a short year return. How do we show her payment for the loans payable?
What happens to the assets? Depreciation expense?
Does she need to file a 966 form with the IRS?

Any advice you could offer would be greatly appreciated. I tried calling the IRS but they stated that this is a tax law issue and they no longer advise on tax law.

Thanks and have a great day.

Sincerely,
Rosa

She will be filing a short year return. How do we show her payment for the loans payable?==============>>>>>>>>>> Dissolution occurs at the state level, not the federal level. The state in which the S corp was incorporated is the state in which the S corp needs to dissolve. The return isn't final until the assets are gone or some other statement implying that this may not be the firm's final return.

What happens to the assets? =============>>>>>>>>>> It's not over till the assets are sold ;the fact is the dissolution doesn't take place until the assets are dissolved even if the client prematurely filed the dissolution papers.So you cannot just zero out the balance sheeton Sch L of 1120S. Nothing leaves the balance sheet unless it is sold, disposed of, or distributed to shareholders.

Depreciation expense? ================>>>>>>>>On dissolution,for example, even if your s-corp is currently having a loss, you are still allowed to deduct depreciation. I guess doing so will/may generate a larger paper loss on the K-1 that will flow to your personal tax return on 1040; you can only deduct losses of the S-Corp against ordinary income to the extent you have basis in the S-Corp. Anything above that is considered a capital loss. It's probably long-term capital loss so it's subject to the $3K per year limit. An S corp, the capital gains pass through separately. To the extent that any S corp losses are deductible by an individual shareholder, you would be available to offset the capital gain income
Does she need to file a 966 form with the IRS?==============>>>>>>>>>> The entity still existed under tax law until the final return is filed, which you'll do, with the 966 and Resolution and Certification as required. The client needs to keep the company open until all tranactions are complete, so they can file a year end final return and not deal with mid year timing

Dear Wnhough,

Thank you for your responses.

This is my first time filing an 1120S final return. My client stated that she has a registered agent handling the papers with NYS but requires the final return to complete the filing.
How do I zero out the assets? Do I have to file the 4797 with the final return for all of the equipment and furniture assets? And where would the asset distribution show up on the Final K-1? Will she need to pay taxes on the assets? She is the sole shareholder of the S Corp? She has no activity for the company since 2/28/2014.
In looking at the instructions for the 966, it states that it may not be necessary for a sub chapter S Corp to file the 966 but when i look at all the rules for closing a company on the IRS and other sights, it states the 966 should be filed. In this case, the client has no subsidiaries. Does she have to file the 966 form?

Please advise. Thanks again and have a great day.

How do I zero out the assets? ========>>>>>>>>>>upon dissolution, a corporation must pay or make provisions to pay all liabilities, return or transfer assets that require transfer by contract condition and distribute remaining assets as outlined in the articles of incorporation and corporate bylaws. For example, it is a common practice for corporations to sell the corporation's assets upon dissolution and disburse the remaining assets to the shareholders after all prior liabilities are taken care of. As said, assets 'distributed' to the S/H are actually sold at fmv, and gain is recognized in the corp, which will pass thru on the K1. If he takes debt with him after killing the corp, that increases basis.

Do I have to file the 4797 with the final return for all of the equipment and furniture assets?========= >>>>>>>>>it depends.You need to treat the assets in accordance with their disposition. If they were disposed of for no salvage value, then there is generally no tax consequences. But if the assets were distributed to the shareholder(s), then there may be taxable income or depreciation recapture, then f4797 is required to report the ordinary income on part 3 on f 4797. There is a capital gain for the corp on the difference between the sale price and book value of assets. The book value is the original cost less depreciation deducted for tax purposes. Book value is also referred to as the adjusted basis in the asset. Expenses for selling assets are charged against the gain for each asset by increasing the basis.Depreciation should be calculated up to the sale date. Hence, depreciation calculated for days in the year of sale that assets are owned by the S corp is deductible on the final corporate tax return.as said you need to report the gain or loss on Form 4797 with the corporation's tax return. The basis and sale proceeds of each asset sold must be separately tracked for reporting in the appropriate section of Form 4797.The sale of a group of assets that comprise an entire business may require the seller and buyer to specify an amount directly allocated to the sold assets. This amount is reportable to the IRS on Form 8594.




And where would the asset distribution show up on the Final K-1?===========>>>>>>>>>>>On Sch K1 of the shareholder. Receiving company assets in a liquidation may have greater tax implications, depending on the value of those items. The S corp needs to treat a distribution of appreciated assets as a sale. Rising market value equates to an appreciated asset. Therefore, the IRS assesses a capital gain in accordance with the shareholders' proportion of ownership, even if only one person receives the property. The S corporation distributes assets at the time of liquidation to its shareholders. Since an S corporation doesn't issue common stock, shareholders are more likely to be founders of the company . The corporation delivers assets to shareholders at FMV. The IRS requires any shareholders receiving assets with depreciated values exceeding fair market to show a gain on federal income tax returns. For example, receiving company equipment with a value of $7K when the fair market value is $3K requires shareholders receiving this equipment record the $7K as income. This leads to higher tax liability.
However, selling corporate assets is an attractive alternative for shareholders during the liquidation of an S corp. Money received from the sale can help pay the corporation's business debts and other financial obligations. Additionally, shareholders don't have to pay taxes on the sale of corporate assets during a liquidation. This occurs because the property never enters the possession of the shareholders. The IRS requires company executives to report the sale of the corporation's assets on the company's final tax return, on 1120S, not on Sch k1 of 1120S at the end of the year.




Will she need to pay taxes on the assets? She is the sole shareholder of the S Corp? She has no activity for the company since 2/28/2014. ===========>>>>>>>>>>As mentioned above; it depends.


In looking at the instructions for the 966, it states that it may not be necessary for a sub chapter S Corp to file the 966 but when i look at all the rules for closing a company on the IRS and other sights, it states the 966 should be filed. In this case, the client has no subsidiaries. Does she have to file the 966 form?==========>>>>>>>>guess it is good idea of having complete the form 966 and have it sent certified mail. If the client tells you about it after the fact, then, you leave it up to the client. Form 966 is required to be filed within 30 days after the resolution or plan is adopted to dissolve the corp or liquidate any of its stock.From a practical viewpoint, in situations where Form 966 has not been filed within the prescribed time, the client needs to file it with an attachment explaining why the form was not filed timely, or depending upon the amount of time that has passed, simply attached Form 966 together with its required attachments to the final corporate tax return filing.

NOTE:A corp remains in existence following dissolution, but only for the purposes of winding-up its affairs and liquidating. "Winding-up" is the time in which the corporation collects its assets, discharges liabilities and conducts other acts necessary to finalize its affairs. Lastly, liquidation occurs when the corporation distributes its remaining assets to the shareholder(s). an S corp is regulated as a corporate entity under state law but allowed pass-through taxation with IRS approval. As a result, dissolving and liquidating an S corp must be done in accordance with corresponding laws in the state in which the S corp is registered to operate. State business codes specify the procedures corporate managers must follow to execute the legal termination and asset liquidation of an S corp. Liquidate the assets of the S corp. Liquidation includes distributing and selling property and other assets the S corp owns. The proceeds from the sale or distribution of property must go toward paying all outstanding debts and obligations the S corp holds.

If the S election terminated during the tax year of 2013,then, the year-end balance sheet generally should agree with the books and records at the end of the tax year. For example, assume that you are filing your final return for S corp (dissolving the corp). At the end of the tax year (12/31/13) there was still cash left in corp account in Sch L that you did not distribute, then you may treat the cash as if it was already distributed. Corps that are liquidating have to wind up their affairs just like any other business. No need to file another tax return; the corp isn't doing any more business.

Thank you so much for all the information. I appreciate you taking the time to respond to all of my questions, with such detail. The information you provided was very helpful. Thank again and have a great day.