Today TaxMama hears from Guy from New Jersey who says, “I am trying to close out a Subchapter S Corporation. How do I deal with the loans I have made to the corporation, and the negative retained earnings? If you could just direct me to the proper IRS publication, I do not mind researching.”
Dear Guy,
I’ve been trying to think of where, in IRS publications you could get the information you’re seeking. Frankly, you’re not going to find it on the IRS site.
You will find Form 966, the form on which to report your Corporate Dissolution or Liquidation
https://www.irs.gov/pub/irs-pdf/f966.pdf
IRS does have a Closing a Business Checklist
https://www.irs.gov/businesses/small/article/0,,id=98703,00.html
But it doesn’t explain the journal entries you’re looking for.
The SBA also has links to an assortment of forms.
https://www.missouribusiness.net/irs/sections/section10/closingyourbusi.htm
Again, no journal entries.
You might find some advice in CCH’s 1120S Express Answers book
https://tax.cchgroup.com/Store/Products/Product+Detail.htm?cs_id=CCE%2DCCH%2D3492%28CCE%29&cs_catalog=TADS
But this may be your best bet – Practical Guide to S Corporations –
https://tax.cchgroup.com/Store/Products/Product+Detail.htm?cs_id=CCE%2DCCH%2D3697%28CCE%29&cs_catalog=TADS
Chapter 12 discusses how to handle termination and the shareholder effects. You can read the Table of Contents here:
https://tax.cchgroup.com/FocusOnTax/2006-02/Practical-Guide-to-S-Corporations—TOC.pdf
On the other hand, you can get in touch with a good tax professional who has experience dissolving S Corporations with negative capital accounts and debt on the books.
Why?
Let’s see, some thing you may find yourself dealing with:
·Phantom income – income that will arise from the negative capital account.
·Suspended Losses – If you were not able to deduct losses in the past, they may offset some of that phantom income.
·Corporation’s relief of debt, when it can’t pay the loan it owes you.
·Your bad debt deduction –
owhether it can be characterized as a capital loss, with all the related limits on the deductions,
oor as a business loss, which is fully deductible immediately
oand perhaps subject it to net operating loss treatment that might lend itself to being carried back and generating immediate refunds – depending on the size of the debt.
Hiring someone with expertise in this area will make all the difference between handling it incorrectly and getting audited and having to pay back-taxes with interest – and perhaps penalties…or not getting audited because the return is prepared correctly with all proper disclosures – and being able to justify business loss treatment – if possible.
Incidentally, just because someone is as CPA or enrolled agent with a lot of tax experience doesn’t mean they will understand the intricacies of this dissolution. Ask!
Make sure they have handled this issue on a regular basis and have done it properly – and survived audit.
At least you know when to cut your losses and move on.
And remember, you can find answers to all kinds of questions about dissolving corporations and all kinds of other tax issues, free. Where? Where else? At TaxMama.com
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- IRS Form 966 :: Corporate Dissolution or Liquidation
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