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.