S Corporation Stock Sales: Mastering Tax Reporting, Income/Loss Allocation and Section 1377 Elections

Description

When an S corporation stockholder sells an entire interest in an S corporation’s stock, the transaction can present significant tax reporting challenges and often undesirable tax results. S corp tax advisers need to know the various elections and provisions to mitigate the impact of income/loss allocations in the year a shareholder sells his interest in a transaction that does not liquidate the corporation.

The general S corporation rules require that income or loss must be allocated on a per-share/per-day basis among all shareholders. However, this can create inequitable tax results, particularly when the exiting shareholder sells the interest to existing shareholders.

Section 1377 provides election options to remedy potential tax issues arising from a shareholder’s sale of his interests. An S corporation may, with the consent of all shareholders, elect to “close the books” as of the date of the sale transaction for purposes of allocating income or loss to an exiting shareholder to avoid negative tax consequences.

This closing of the books election requires specific allocation and reporting calculations, and often involves year-end basis allocations to the purchasing shareholder. A thorough understanding of the Section 1377 election rules will enable tax advisers to S corporations and their shareholders to help avoid costly tax consequences.

Listen as our experienced panel provides a practical guide to the election and allocation tax challenges of reporting a shareholder’s sale of S corporation interests.