Hello Tax Guru,

I have recently sold my S corp (December 31, 2009), and have agreed to receive payments from the buyer until paid in full. I incorporated in 2004 and have had some successful years as well as dismal years in terms of sales and earnings.

The S corp will do no more business moving forward, and will only be receiving the monthly check for the sale from the buyer. The time is 42 months. As a note, this is a very small S corp and the total sale is under $50k.

My concern is that if I keep the S corp active throughout the term of the sale, and file with the IRS for the next 4 years, without showing any activity, the IRS could determine that I am a hobby and reclassify me. Is this fear valid?

In the first year of the sale, I will not receive all of my initial paid in capital, so I presume that I do not need to report the payments from the buyer on my personal tax filing. Is this true?

However, in year two of the sale I will exceed the paid in capital and I presume that I will need to show the IRS the gains. Again, is this true?


Should I dissolve the S corp properly within my state? Ideally, I would like to reclassify as a sole proprietor and simply post the monthly payments on schedule c, for the IRS.

Please advise the best way I should move forward.

Did you sell the assets of the S corporation or the S Corporation itself? If you sold the S corporation then you are subject to the Short Year filing requirement. If you did indeed sell the S Corporation, the note is then made to your personally and you need not report tax return filing of the S corporation as you are no longer the owner!

Lets clarify this first.

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We sold the asset not the corporation. The asset is the right to perform business of a patented process in a specific territory.

Thanks for your quick response earlier.

Your S corporation can remain inactive without showing any income producing activity for as long as you like without any fear that the IRS could determine that you are a hobby! Thus, your fear is not valid!

In fact, you should not dissolve your S corporation until you have collected all your payments on the Note! Thus, you should keep filing your S corporation and pay any minimum State Franchise taxes that are applicable to your S Corporation.

Additionally, in the first year of the sale, you not be reporting any income on your personal tax return other than that what is reported on the K-1. The income received from the payment would be similar to the Installment payment, where some component would be basis and balance would be profit. You would have to determine the gross profit percentage on the sale of the assets of the S corporation, which would generally be the sale of the assets less the basis that you have on the books, that is, all of goodwill can be written off on the sale of the assets). I would suspect that your profit may be considerably reduced as a result of the offsetting the sale against the goodwill.

But, I would like to stress that you really should be using the services of Tax Professional to help you prepare the S Corporation tax return.

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Ask TaxGuru Please refer to the legal disclaimer.