How to correctly record Treasury Stock Purchase and Sale transactions for an S Corporation

The accounting for treasury stock can definitely be confusing, especially for S corporations where tax basis matters. Let me help clarify this. For the buyback transaction: When your S corp purchases shares from a shareholder, you're right that the shareholder records a gain of $54,000 ($67,500 - $13,500). For the corporation, you would: - Debit Treasury Stock $67,500 (this is the cost method of accounting for treasury stock) - Credit Cash $67,500 That's it for the purchase. You don't touch the shareholder's equity account at this point. The original contributed capital (common stock and APIC) remains on the books. For the resale transaction: When you sell the treasury shares to an existing shareholder: - Debit Cash $81,000 - Credit Treasury Stock $67,500 - Credit Additional Paid-in Capital from Treasury Stock $13,500 The basis for the purchasing shareholder is what they paid ($81,000), not what's on the corporation's books. The shareholder's tax basis and the corporation's accounting entries are separate matters.

Just wanted to share my experience using https://taxr.ai when I ran into a similar treasury stock issue with my S Corp last year. Our situation was a bit more complex because we had multiple classes of shares and some prior year distributions that complicated everything. My CPA was giving me conflicting advice about how to handle the treasury stock transactions, and I was worried about messing up our shareholder basis calculations. I uploaded our operating agreement, prior stock purchase agreements, and corporate minutes to taxr.ai, and they analyzed everything and provided clear guidance on the proper accounting entries. They even identified a potential issue with our shareholder agreements that could have created unintended tax consequences. The service saved me a ton of time researching this niche area of S Corp accounting.

I initially doubted that an AI service could handle complex S Corp treasury stock issues, but I gave https://taxr.ai a try after seeing it mentioned here. I was genuinely surprised by how comprehensive their analysis was. I had a situation where my S Corp needed to buy back shares from a retiring shareholder, but we had multiple loans between the shareholder and corporation that needed to be factored into the transaction. The service helped me understand how to properly structure the redemption to avoid dividend treatment and provided detailed journal entries for both the corporation and the departing shareholder. What impressed me most was how they explained the impact on the AAA account and the remaining shareholders' basis calculations. They even included warnings about potential termination of S status if we didn't handle certain aspects correctly. Definitely worth checking out if you're dealing with treasury stock issues.

Has anyone had success getting through to the IRS business helpline on this? I've been trying for WEEKS to get clarity on an S Corp treasury stock issue. I'm on hold for hours only to get disconnected. It's infuriating when you're trying to do things correctly and can't get basic guidance. I heard about https://claimyr.com that supposedly gets you through to an IRS agent quickly. There's a video showing how it works at https://youtu.be/_kiP6q8DX5c. Has anyone tried this for S Corp specific questions? I'm desperate at this point - our buyout is happening next month and I need clear guidance on the treasury stock accounting and tax treatment.

I need to eat my words about Claimyr. After commenting that it seemed like BS, I was desperate enough to try it last week for an S Corp treasury stock issue similar to the original post. After struggling for nearly a month trying to reach someone at the IRS Business Helpline, I used the service and got connected to an agent in about 37 minutes. The agent was actually quite helpful with my treasury stock accounting questions and confirmed that the excess of the purchase price over the departing shareholder's basis should reduce our AAA account, not be treated as income. They also helped clarify how to report this on our 1120-S and the impact on the remaining shareholders' K-1s. Saved me hours of frustration and potentially costly mistakes. Sometimes being wrong feels pretty good!

One thing nobody's mentioned yet is how treasury stock affects your corporate governance. When those shares are in treasury, they typically don't vote or receive distributions. This can change the effective ownership percentages of the remaining shareholders. In your example, after buying out the 25% shareholder, the remaining three shareholders would each effectively control 33.33% of the voting power (assuming one share = one vote), even though they still technically own just 25% of the total issued shares. Make sure your corporate bylaws address how treasury shares are treated for voting and distribution purposes. This is especially important for S corps where distributions must generally be proportionate to ownership.

Has anyone considered the simpler approach of just treating this as a stock redemption rather than creating treasury stock? With an S corp, you could have the company redeem the shares completely rather than holding them as treasury stock. The journal entry would be: - Dr Retained Earnings $67,500 - Cr Cash $67,500 This eliminates the complications of treasury stock accounting and clearly reduces the total outstanding shares. Then if you want to issue new shares later, you'd treat it as a new issuance rather than reselling treasury shares.

Great point about the redemption approach, Nina. However, there's an important distinction to make here. For S corporations, redemptions are generally treated as sales or exchanges under IRC Section 302, which means the departing shareholder still recognizes the $54,000 gain regardless of whether you use treasury stock accounting or direct redemption. The key difference is in the corporate-level accounting and potential impact on the AAA account. With a redemption, you're correct that it would reduce AAA by the excess of the redemption price over the shareholder's basis. But with treasury stock, the corporation doesn't recognize any gain or loss on the purchase, and the AAA impact might be deferred until the shares are resold or retired. Another consideration is flexibility - holding treasury stock gives you more options for future transactions (employee stock plans, acquisitions, etc.) without needing to go through the formal process of authorizing and issuing new shares. The choice really depends on your long-term plans and state law requirements.

This is a really helpful discussion! I've been following along as someone who's fairly new to S Corp accounting, and I'm wondering about the practical timeline considerations here. When you're planning a treasury stock buyout like this, are there any IRS notification requirements or deadlines you need to be aware of? For example, do you need to update your corporate records or file anything with the IRS within a certain timeframe after the transaction? Also, I'm curious about the mechanics of updating shareholder basis calculations. Since the remaining shareholders will have increased voting percentages (as Haley mentioned), but their actual ownership percentages stay the same until the treasury shares are resold, how do you track basis adjustments for future distributions? Do you calculate distributions based on the original share percentages or the effective percentages after excluding treasury shares? Sorry for all the questions - just trying to understand the full picture before our company potentially goes down this path!

I appreciate all the detailed responses here! As someone who's dealt with similar S Corp treasury stock situations, I want to emphasize the importance of getting your shareholder agreement language right from the start. One thing I learned the hard way is that your buy-sell agreement should clearly specify whether buyouts will be treated as redemptions or treasury stock purchases, and what valuation method you'll use. In your case, paying $67,500 for shares with a $13,500 basis suggests you're using fair market value rather than book value. Also, make sure your agreement addresses what happens to the treasury shares long-term. Will they be retired after a certain period? Reserved for employee incentive plans? Offered first to existing shareholders? Having this clarity upfront can save you from difficult decisions later. One more practical tip - if you're planning to resell those treasury shares soon after the buyout, consider whether the timing might create any appearance of a pre-arranged transaction that could affect how the IRS views the original redemption. The tax treatment should be the same either way, but clear documentation of your business reasons for each transaction never hurts. The journal entries that Tony outlined earlier are spot-on for the accounting treatment. Just remember that good documentation and clear corporate governance are just as important as getting the numbers right!