o My question is whether how i got to the zero balances is proper. Corp sold all assets for cash and assumption of liabilities associated with the assets sold. The sale resulted in a profit. The books had shareholder loans (liabilities). I applied a portion of the profit from the sale to restore basis in the shareholder loan to the loan balance. Therefore no need to recognize income on the loan repayment. ====>>in general, You need to adjust your loan basis at the end of each tax year. Your Additional loans to the corp INCREASEs YOUR LOAN BASIS; Shareholders run into problems when they have reduced their debt basis and the corp repays any part of a shareholder loan. When the company repays a loan where the shareholder?s debt basis is less than the face value of the loan, the shareholder must take a portion of the repayment into income. Whether shareholders recognize ordinary / capital gain income depends on the nature of the loans in their hands. IRC provides that retirement of debt instruments are exchanges. Thus, if a loan is evidenced by a note, the income portion of the repayment is considered capital because the note is considered capital in the shareholder?s hands. If the loan is an ?open account,? or a loan not evidenced by a note, the income portion of the repayment is ordinary income
When all journal entries were made to zero out the accounts I was left with a negative retained earnings balance. Is it proper to offset the negative R/E account to capital stock? =====> it depends; I wouldn't have shown anything on Sch D unless you closed the business rendering the stock worthless. I think you should leave the negative amount alone and yes it does reduce your sharholders basis by the same amount. If that basis goes to zero I believe that further losses are not allowed until capital is replaced.
This is increasing the stock account. Also, the remaining amount of profit after loan restoration is increasing stock basis. There is no cash left so there will be no liquidating distribution. On the shareholder's personal return I would report the gain from the K1 and was going to take a 1244 stock loss for the sale of stock back to the corporation for zero dollars. The 1244 stock loss would be equal to the remaining basis. Am I treating this correctly? ---------->>>>> Only individuals who originally purchased the stock may claim an ordinary loss on Section 1244 stock rather than a capital loss. So, if you purchased it from an original purchaser, you cannot claim an ordinary loss deduction on Section 1244 stock In general aslongas the S corp owns Section 1244 stock and passes a loss on the stock to its shareholders, they may not deduct the loss as an ordinary loss. Instead, they must deduct the loss as a capital loss. So,
If you own stock in a qualifying small corp and the business fails causing its stock to become worthless, you can claim an ordinary loss, up to certain limits, against your other sources of income.An ordinary loss is more beneficial than a capital loss because it is fully (100%) deductible in a tax year.
A capital loss is only deductible up to a maximum of $3k per year. Any excess capital loss over $3k must be carried over to the next tax year.