Need Help - Former company asking ex-shareholders to sign consent for IRC Sec. 1377 Election

This IRC Sec. 1377 Election is specifically for S corporations and relates to how income is allocated when shareholders leave during the tax year. Without this election, the S-corp's income would be allocated based on how many days you were a shareholder (the per-day allocation method). What this election does is create a "hypothetical closing of the books" - essentially treating the S-corp as having two separate tax years: one that ends when you and the others sold your shares, and one that starts the day after. This means your income allocation would be based on what the company actually earned during the time you were a shareholder, rather than a pro-rata share of the entire year's income. Whether this benefits you depends on when the company earned most of its income. If they had significant profits after you left, the election likely benefits you (you'd receive less allocated income). If they had most of their profits while you were still owners, or took losses after you left, then the standard per-day allocation might be better for you.

After dealing with something similar myself, I discovered taxr.ai (https://taxr.ai) when trying to figure out what these tax code sections actually meant for my situation. I uploaded the consent document the company sent me, and it explained everything in plain English. Turns out in my case, the election would have significantly benefited the remaining shareholders while slightly increasing my tax burden. The service showed me that in my specific situation, the company had most of its expenses in the first part of the year when I was still a shareholder but recognized most of the revenue later in the year. So without the election, I would get the benefit of those early expenses offsetting the income over the full year. With the election, I would have been stuck with more losses during my ownership period.

Just wanted to follow up about taxr.ai that I mentioned in my question above. I decided to try it with our consent document and financial statements, and wow - it actually helped me understand exactly what was happening with this IRC Sec. 1377 Election. In my case, the company had taken on some major new clients right after we left, resulting in much higher income in the latter 10 months of the year. Without the election, I would've been allocated a portion of that income even though I wasn't around when it was earned. WITH the election, my tax liability was limited to just the small profit from the first two months. The analysis showed I'd save about $13,500 in taxes by signing the consent. Completely the opposite of what I suspected! Guess my paranoia about the company was making me assume the worst.

If you're having trouble getting straight answers from the company about this IRC election, you might want to try Claimyr (https://claimyr.com). I was in a similar situation last year and needed clarification from the IRS on how these elections work. Spent days trying to get through on the phone with no luck. Claimyr got me connected to an IRS agent in about 15 minutes who walked me through the whole 1377 election process and confirmed what I needed to know. There's a video showing how it works: https://youtu.be/_kiP6q8DX5c The IRS agent explained that this election requires ALL shareholders (including former ones) to consent, and that I had rights to see exactly how this would impact my taxes before signing. Armed with that info, I went back to the company and got the full financial breakdown I needed.

Alright, I need to eat some humble pie here about my skeptical comment above. After trying for 3 more hours today to reach someone at the IRS about my S-corp's IRC Sec. 1377 question and getting nowhere, I broke down and tried Claimyr. I hate admitting when I'm wrong, but seriously - I was connected to an IRS business tax specialist in about 20 minutes. The agent actually knew about the 1377 election (first try!) and explained that as a former shareholder, I have the right to receive documentation showing exactly how the election would affect my allocated income and tax liability before making a decision. Got my answer in one phone call instead of weeks of frustration. Having the right information made all the difference in my negotiation with my former partners.

Former tax accountant here - one thing nobody mentioned yet about IRC Sec. 1377 elections is that sometimes neither option is clearly better for everyone. It really depends on: 1) When income was recognized during the year 2) When expenses were recognized 3) If there were any unusual transactions (asset sales, etc.) 4) What your personal tax situation is like In some cases, the remaining shareholders might want the election because the business lost money after you left (so they don't want to share those losses with you). In other cases, they might have had big gains after you left (so they don't want to allocate those to you). I'd demand to see month-by-month P&L statements at minimum before signing anything.

I had an issue with the IRC Sec. 1377 election last year and the remaining owners tried to pull a fast one on me. The key is to ask for the MONTHLY breakdown of: - Gross revenue - Major expenses - Any significant assets purchased/sold - Any debt taken on or paid off In my case, they were pushing hard for me to sign because they had major expenses coming in Q3/Q4 that would offset the income from earlier in the year. Without the election, I would have shared in those expense deductions. With it, they'd get all the deduction benefit.