1120S Sale
Hi Everyone!
I have an S-Corp which sold with a contract date of 1/1/23. The stock was transferred as of 1/1/23.
The single shareholder has distributions in excess of basis which were classified as shareholder loans receivable, as the intent was to offset future S-Corp earnings until the AAA account was positive, but this did not happen. There is NBV of fixed assets $15k, SH Loan Rec $135k and a SBA loan payable $150k.
The single shareholder sold the stock and no other compensation was received. The effective date is 1/1/23.
The new S-corp owners assumed the SBA loan debt which was in the name of the company as well as discharge of shareholder debt.
As I see it, in 2022, the shareholder has to recognize regular income for the shareholder debt - 1099-C. Form 1120S - no deduction given, but a M-1 adjustment. This puts the balance sheet all out of whack. Assets $15k; SBA Loan $150k and Retained Earnings -135k - also I believe this would carry forward to the new company - no step up in basis, etc. Form 8594 poses an issue...there is no real consideration outside of the stock purchase, thus no sales price allocation?
The shareholder recognizes capital gain income from the monies received as a result of the stock sale. This becomes outside basis for the new shareholders.
Originally, I was thinking that the sales price would be the $135k of SH debt/excess distributions since it was assumed. The seller would recognize $135 of capital gain income and the allocation of sales price to assets would include goodwill. I would still have an issue with the balance sheet. I don't think it is appropriate to just zero it out.
Any insight you could provide would be greatly appreciated.
