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Old 01-27-2014, 10:26 AM
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S-Corp Dissolution

I have a client who sold her business in October 2013 (S-Corp) and subsequently legally dissolved the business in late December. There was poor communication between the attorney that did the dissolution and myself and there are still wind-down activities going on which will cross-over between 2013 and 2014. All operations have ceased in 2013 at the time of the sale however, there are still certain liabilities which had yet to be settled at December 31, 2013 and final distributions to be made to the shareholders once all remaining obligations are paid (most of the cash from the sale was distributed at the time of sale)

My question is whether or not 2013 is my final tax year or 2014 is my final tax year. I'm filing the 966 - Corporate Dissolution paperwork with the IRS this week .



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Old 01-27-2014, 01:10 PM
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Originally Posted by goldiland View Post

My question is whether or not 2013 is my final tax year or 2014 is my final tax year. I'm filing the 966 - Corporate Dissolution paperwork with the IRS this week .
I guess 2013 is the final tax year for the S corp; 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. Creditors, owners and members are eligible to receive proceeds from property liquidation. However, in many states, creditors have first priority to claim proceeds from property sold to settle debts. The owners of the S corp have the right to receive property or proceeds from property liquidation only upon the discharge of all outstanding obligations to creditors. You need to file the final tax documents with the IRS. A dissolving S corp is required to file form 966 with the IRS within 30 days of adopting a corporate resolution to dissolve and liquidate the S corp. Form 966 requires identifying information about the dissolving S corp including name, address and incorporation date. Further, you need to file the final income tax return on form 1120S for the S corp within 3 months after the dissolution date. The IRS requires the S corp to file the final return by the 15th of the third month after dissolution.



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Old 01-27-2014, 07:14 PM
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S-Corp Dissolution

I appreciate the response. The issue really is whether the IRS will accept a final return that still has balances on Schedule L, which is what the 12/31/2013 return will have. I agree that the rules clearly are that once a company is formally dissolved, a final return is due within 2 1/2 months after the dissolution

Unfortunately, the client's lawyer dissolved the company prior to winding everything down. My preference in these situations is typically to have the shareholders consent to a plan of liquidation which allows any cash distributions to be treated as liquidating distributions for tax purposes and only dissolve the company legally after everything has been paid and distributed. That way, the final return has zero's on the balance sheet which is what should be represented on the final filed Schedule L.



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Old 01-28-2014, 06:00 AM
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Originally Posted by goldiland View Post
Unfortunately, the client's lawyer dissolved the company prior to winding everything down. My preference in these situations is typically to have the shareholders consent to a plan of liquidation which allows any cash distributions to be treated as liquidating distributions for tax purposes and only dissolve the company legally after everything has been paid and distributed. That way, the final return has zero's on the balance sheet which is what should be represented on the final filed Schedule L.
Agreed.As yu accurately pointed it out here, 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.



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