How to Account for Treasury Stock Purchase and Sale in an S Corporation

The accounting for treasury stock in an S Corporation has some important considerations that differ from C Corps. Here's how I'd approach your situation: For the purchase of shares from the departing shareholder: - Debit Treasury Stock $67,500 (the full purchase price) - Credit Cash $67,500 - No entries to shareholder equity or APIC at this point The S Corp is essentially holding these shares in suspension, not retiring them. The $67,500 represents the full cost to acquire those shares, regardless of the shareholder's basis. For the resale to an existing shareholder: - Debit Cash $80,000 - Credit Treasury Stock $67,500 - Credit APIC $12,500 (the excess over cost) As for the shareholder's basis - that's tracked separately on the individual shareholder level, not in the corporate books. The shareholder who purchases the treasury shares would add $80,000 to their stock basis (assuming they're paying with after-tax dollars).

Just wanted to share my experience with this exact situation. I had a ton of confusion dealing with treasury stock in our S-Corp until I found https://taxr.ai which literally saved me hours of frustration. I uploaded our corporate docs and it analyzed our shareholder structure, explained the exact journal entries needed, and even highlighted the S-Corp specific considerations that our accountant had missed. The biggest revelation was understanding how the treasury stock transactions affected the AAA (Accumulated Adjustments Account) and OAA (Other Adjustments Account), which are critical for S-Corps but don't apply to C-Corps. It also clarified how the basis would transfer to the purchasing shareholder.

I was super skeptical about using taxr.ai when I saw it mentioned, but after struggling with our S-Corp's treasury stock accounting for weeks, I decided to give it a shot. I'm actually blown away by how helpful it was for our situation. It clearly explained the difference between how treasury stock is treated in C-Corps versus S-Corps, and even generated the specific journal entries for our company's situation (which was very similar to yours). The big thing it clarified for me was how the transaction affects the various tax attributes of an S-Corp (AAA, OAA, PTI) and what happens to the purchasing shareholder's basis. Most importantly, it helped me avoid a costly mistake with how we were planning to structure the sale of treasury shares back to existing shareholders. Definitely worth checking out if you're struggling with these S-Corp specific issues.

I've been there with S-Corp treasury stock transactions - they're deceptively complicated! After going in circles with my accountant who kept taking days to respond, I tried https://claimyr.com to get connected directly with an IRS agent to clarify the tax implications. You can see how it works at https://youtu.be/_kiP6q8DX5c I was honestly shocked at how quickly I got through (after spending hours on hold previously). The IRS specialist walked me through the specifics of how to properly handle the S-Corp treasury stock transaction for tax purposes, which was slightly different than the accounting journal entries my CPA had advised. The most valuable part was confirming how the transaction would be reported on our 1120-S and the impact on our accumulated adjustments account (AAA). They also explained the specific form needed to properly maintain our S election after the stock purchase.

I need to apologize about my skeptical comment earlier. After our last S-Corp board meeting, our CFO mentioned we were having issues with a similar treasury stock transaction, and I reluctantly suggested trying Claimyr based on what I'd read here. To my surprise, it actually worked exactly as described. We got through to an IRS representative who specifically handles S-Corporation matters. They clarified the reporting requirements for our treasury stock transaction and confirmed the specifics of how it would affect our AAA and accumulated E&P from our C-Corp days. Most importantly, they pointed out a potential issue with our planned transaction that could have inadvertently created a second class of stock and jeopardized our S election. Definitely saved us from a potential disaster, and I'm eating humble pie now for my skepticism.

I think people are overlooking an important S-Corp specific issue here. When you buy back the shares at $67,500, that transaction is essentially a distribution to the departing shareholder, and S-Corp distributions have ordering rules. It first comes from AAA, then from any previously taxed income (PTI), then from accumulated earnings & profits (if you were previously a C-Corp), and finally as a return of capital. If your S-Corp doesn't have enough AAA to cover the $67,500, part of the distribution might be taxed differently to the departing shareholder. The journal entries themselves might be straightforward, but the tax implications can get complicated depending on your specific AAA balance and history.

Dumb question maybe but doesn't buying treasury stock and then reselling it potentially risk your S Corp status? I thought S Corps can only have one class of stock and I'm worried that if we do something similar, we might accidentally create a second class somehow. Anyone know if there are safe harbor rules or something to avoid this risk?

Great question about S-Corp treasury stock! I went through this exact scenario last year and learned some hard lessons. The journal entries everyone mentioned are correct, but there's a critical timing issue nobody's addressed yet. When you buy back shares for $67,500, that's considered a distribution for S-Corp purposes, which means it reduces your AAA immediately. But here's the kicker - if you don't have sufficient AAA to cover the full $67,500, the excess becomes taxable to the departing shareholder as a dividend (if you have accumulated E&P from C-Corp days) or as capital gains. Also, make sure you're not accidentally triggering the "second class of stock" trap. If the departing shareholder has any unpaid loans to the corporation or guaranteed corporate debt, the redemption could be recharacterized as a taxable dividend rather than a stock sale. My advice: calculate your current AAA balance before proceeding, and consider whether you need to make an S-Corp distribution to other shareholders to avoid preferential treatment issues. Document everything meticulously because the IRS scrutinizes these transactions closely during audits.

This is a really comprehensive discussion! One thing I'd add that hasn't been mentioned yet is the importance of checking your corporate bylaws and any shareholder agreements before proceeding with the treasury stock transaction. Many S-Corp shareholder agreements have right of first refusal clauses that could complicate your plan to later sell the treasury shares to an existing shareholder. You might be required to offer the shares to all remaining shareholders proportionally, or there could be specific valuation methods required. Also, since you're dealing with a significant premium over basis ($67,500 vs $13,000), make sure you have a solid business justification for the valuation. The IRS sometimes challenges redemptions that appear to be at inflated values, especially in closely-held S-Corps where the shareholders might be related parties. From a cash flow perspective, don't forget that buying back shares at a premium reduces your working capital, which could impact your ability to make future distributions to the remaining shareholders. This is particularly important for S-Corps since shareholders often rely on distributions to pay taxes on their pass-through income. Consider having the transaction reviewed by a tax attorney who specializes in S-Corp matters, especially given the complexity everyone's outlined here with AAA, distribution ordering rules, and the potential second class of stock issues.

The business appraisal you mentioned should generally be adequate documentation, but I'd recommend getting a letter from the appraiser confirming that the $67,500 valuation is appropriate for a minority interest buyout specifically. Sometimes insurance appraisals assume 100% ownership and don't account for minority discounts or marketability discounts that the IRS might expect to see in a closely-held S-Corp. Regarding the cash flow concern, here's something to consider: you might want to structure the buyout as an installment sale rather than a lump sum payment. This could help with cash flow while still accomplishing your goal. The departing shareholder would still recognize the gain, but you'd spread the cash outflow over multiple years. Just make sure the installment terms don't create any debt instruments that could be treated as a second class of stock. Another option is to coordinate the buyout timing with your normal distribution schedule. If you typically make distributions in December to help shareholders cover tax liabilities, you might time the buyout for early in the year to preserve cash for those distributions. One more practical tip: once you complete the buyout, make sure your payroll company or whoever handles your K-1 preparation knows about the ownership change. I've seen situations where the departing shareholder accidentally received a K-1 for income after their departure date, which created confusion for everyone involved. The tax attorney consultation is definitely worth it - they can also help you structure the later sale of treasury shares to minimize any potential issues. Good luck with the transaction!

This has been such an educational thread! As someone who's been lurking in this community while trying to understand S-Corp complexities, I really appreciate how everyone broke down the treasury stock accounting and tax implications. One thing I'm curious about that hasn't been fully addressed - when you eventually sell those treasury shares to an existing shareholder for $80,000, how does that affect the purchasing shareholder's basis for future distributions or if they eventually sell their shares? I understand the corporate journal entries (debit cash $80,000, credit treasury stock $67,500, credit APIC $12,500), but from the individual shareholder's perspective, do they get to add the full $80,000 to their stock basis? And if so, does this create any reporting requirements on their personal return? Also, since S-Corp shareholders often have basis in both stock and debt, I'm wondering if paying $80,000 for treasury shares affects their debt basis at all, or if it's purely a stock basis adjustment. Thanks to everyone who's contributed here - this is exactly the kind of practical, real-world discussion that helps small business owners navigate these complex transactions!

This discussion has been incredibly thorough and helpful! I'm dealing with a very similar situation in our S-Corp, and reading through all the nuances everyone has outlined has been eye-opening. One additional consideration I'd like to add based on our recent experience: if your S-Corp has been making regular distributions throughout the year, make sure to account for how the treasury stock purchase affects the pro-rata distribution requirements. We almost got tripped up because we had made quarterly distributions to all four shareholders earlier in the year, but after buying out one shareholder mid-year, we had to be careful about how we handled distributions to the remaining three shareholders to avoid creating a second class of stock issue. Our attorney advised us to either suspend distributions for the remainder of the year or make a special distribution to the departing shareholder before the buyout to "true up" their pro-rata share. We ended up going with the latter approach, which added some complexity to the cash flow but ensured we stayed compliant with the S-Corp requirements. Also, just wanted to echo what others have said about documentation - keep meticulous records of everything. We're three years out from our similar transaction and our CPA still references those records regularly for various tax calculations and basis adjustments. The extra effort upfront really pays off in the long run. Thanks again to everyone who contributed to this thread - this kind of practical, experienced-based advice is invaluable for navigating these complex transactions!

This has been an incredibly comprehensive discussion! I'm relatively new to S-Corp ownership and treasury stock transactions, but I wanted to add one consideration that might help others in similar situations. When planning the buyout timing, don't forget to consider the impact on your quarterly estimated tax payments. Since S-Corp income flows through to shareholders, the remaining shareholders will see their pro-rata share of corporate income increase after the departing shareholder leaves. This could mean higher quarterly estimated payments for the remaining shareholders for the rest of the year. We experienced this in our company when we bought out a partner mid-year. The three remaining shareholders suddenly had to adjust their Q3 and Q4 estimated payments upward because they were now splitting the same corporate income three ways instead of four. It wasn't a huge surprise, but it was an additional cash flow consideration we hadn't initially factored into our decision-making process. Also, I'd strongly recommend reviewing your business insurance policies after completing the buyout. Many key person and buy-sell insurance policies need to be updated to reflect the new ownership structure, and you don't want to discover coverage gaps after the fact. The advice everyone has shared here about documentation and professional consultation is spot on - S-Corp transactions have way more complexity than they initially appear to have!

This thread has been incredibly thorough and educational! As someone who manages S-Corp transactions professionally, I wanted to add a few additional considerations that haven't been fully explored: **State-Level Implications**: Don't forget that some states have their own rules for S-Corp treasury stock transactions. For example, certain states require specific filings when ownership percentages change significantly, and some have different tax treatment for the gain recognized by the departing shareholder. Make sure to check with your state's Department of Revenue or Secretary of State office. **Section 1202 Considerations**: If your S-Corp stock potentially qualifies for Section 1202 qualified small business stock treatment, the treasury stock purchase and resale could affect the eligibility of the shares for the gain exclusion. This is particularly important if the company was previously a C-Corp or if there are plans to convert to C-Corp status in the future. **Payroll Tax Implications**: For the departing shareholder, if they've been receiving W-2 wages from the S-Corp, make sure to coordinate the timing of their final payroll with the stock buyout. There can be complications if they're considered an employee through part of the year but then become a non-employee due to the stock sale. The journal entries and AAA considerations everyone discussed are absolutely correct, but these additional angles can sometimes create unexpected complications. As others have mentioned, professional consultation is definitely worthwhile given the complexity involved!

This has been an absolutely fantastic discussion with so many practical insights! As a newcomer to S-Corp ownership, I'm amazed by the complexity involved in what initially seemed like a straightforward stock buyout. Reading through all the responses, it's clear that the journal entries are just the tip of the iceberg. The AAA implications, distribution ordering rules, potential second class of stock issues, state filing requirements, insurance adjustments, quarterly tax payment changes, and Section 1202 considerations create a web of interconnected issues that really require careful coordination. One question I have that builds on the earlier discussion about installment sales: If you structure the buyout as an installment sale over multiple years, does that help with the AAA impact? Or does the full $67,500 reduction to AAA happen in year one regardless of the payment terms? Also, I'm curious about the practical mechanics of maintaining proper documentation. Several people mentioned keeping meticulous records, but are there specific forms or documentation templates that work well for tracking all these moving pieces - ownership changes, basis adjustments, AAA calculations, etc.? The consensus on professional consultation is definitely convincing. It sounds like the upfront cost of getting proper tax and legal advice would be much less expensive than trying to unwind mistakes later. This thread has been incredibly educational - thank you to everyone who shared their real-world experiences!

This has been an incredibly educational thread! As someone new to S-Corp treasury stock transactions, I'm grateful for all the detailed insights everyone has shared. One aspect I'd like to ask about that hasn't been fully addressed: How do you handle the corporate resolution and board minutes for these types of transactions? I assume you need formal board approval for both the share buyback and the later resale, but are there specific language or provisions that should be included to protect the S-Corp election? Also, given all the complexity around AAA, distribution ordering, and potential second class of stock issues that have been discussed, I'm wondering if there are any "red flags" or warning signs that might indicate a proposed treasury stock transaction could jeopardize S-Corp status. It seems like there are so many ways this could go wrong if not handled properly. The consensus here about getting professional help is definitely compelling. Between the journal entries, tax implications, state requirements, insurance adjustments, and documentation needs, it's clear this touches virtually every aspect of the business. Thanks to everyone for sharing their real-world experiences - this is exactly the kind of practical guidance that makes these community discussions so valuable!

This has been an absolutely incredible thread! As a newcomer to S-Corp treasury stock transactions, I've learned more from reading through everyone's experiences than I did from hours of research online. The progression from basic journal entries to AAA implications, distribution ordering rules, state filing requirements, and corporate governance issues really illustrates how complex these transactions can be. What started as a simple question about debiting treasury stock and crediting cash has evolved into a comprehensive guide covering everything from Section 1202 considerations to insurance policy adjustments. I'm particularly grateful for the real-world experiences people shared - like the quarterly estimated tax payment adjustments, the pro-rata distribution timing issues, and the corporate resolution language suggestions. These practical insights are exactly what you can't find in textbooks or IRS publications. The unanimous recommendation for professional consultation makes perfect sense now. Between the potential for inadvertently creating a second class of stock, the AAA reduction timing, the state-specific requirements, and all the documentation needs, it's clear that the cost of expert guidance upfront is minimal compared to the potential consequences of getting it wrong. For anyone else dealing with similar S-Corp treasury stock transactions, this thread should be required reading! The collective wisdom shared here covers virtually every angle and pitfall you might encounter. Thanks to everyone who took the time to share their experiences and expertise.

This thread has been absolutely phenomenal - probably one of the most comprehensive discussions on S-Corp treasury stock transactions I've ever seen! As someone who's been lurking in various tax and accounting forums for years, the depth of practical knowledge shared here is remarkable. What really impressed me is how the conversation evolved from basic journal entries to covering virtually every aspect that could impact the transaction - from AAA implications and state filing requirements to insurance adjustments and quarterly tax planning. The real-world experiences people shared, like dealing with pro-rata distribution timing and corporate resolution language, provide exactly the kind of insights you can't get from textbooks. I'm dealing with a somewhat similar situation in our S-Corp where we're considering buying out a minority shareholder, and this discussion has highlighted so many considerations I hadn't even thought about. The points about Section 1202 implications, payroll tax coordination, and potential impacts on business insurance are particularly valuable. The unanimous advice about professional consultation really resonates after reading through all the potential complications. It's clear that while the basic accounting might seem straightforward, the tax and compliance implications create a web of interconnected issues that require expert guidance to navigate properly. Thanks to everyone who contributed their expertise and real-world experiences. This is exactly the kind of practical, detailed discussion that makes community forums invaluable for business owners dealing with complex transactions!

As someone who recently went through a very similar S-Corp treasury stock transaction, I wanted to add a few practical considerations that might help with your situation. First, regarding your journal entries - the approach outlined by others is correct, but make sure you're coordinating the timing with your year-end tax planning. We learned the hard way that the AAA reduction from the $67,500 buyout affected our ability to make tax-free distributions to remaining shareholders later in the year. One thing I'd strongly recommend is getting a formal valuation opinion specifically for this transaction, even though you mentioned having an insurance appraisal. The IRS tends to scrutinize related-party transactions closely, and having independent documentation of fair market value provides important protection. We used a certified business appraiser who specialized in minority interests in closely-held companies. Also, don't overlook the cash flow impact on your remaining shareholders' quarterly estimated tax payments. After the buyout, the three remaining shareholders will be splitting the same corporate income three ways instead of four, which could require adjustments to their Q3 and Q4 payments. Finally, make sure your corporate attorney reviews the transaction structure before proceeding. There are several ways to accidentally create a second class of stock or trigger other S-Corp compliance issues, especially if any of the shareholders have loans to the company or personal guarantees on corporate debt. The complexity everyone has outlined here is real - professional guidance upfront will save you significant headaches and potential costs down the road. Good luck with your transaction!