Sale of S Corp stock to another shareholder - properly reporting tax implications

When you're dealing with an S Corp stock sale like this, you need to break it down into its components. Here's how I'd approach your situation: For basis allocation to inventory, the most common approach is to use the relative fair market value method. Since the purchase agreement specifically values the inventory portion, that makes your job easier - the agreement has essentially done the allocation for you. Regarding reporting, you're dealing with two separate assets here: the S Corp stock and the inventory. For the stock sale, you'd report the $145k as an installment sale on Form 6252 if payments are spread over multiple years. The inventory portion ($182k) would be reported separately on Schedule D as it represents a sale of business property, not corporate stock. And yes, you absolutely need to calculate an updated basis as of May 15th. The selling shareholder's basis would include their share of income/loss from January 1 through May 15, 2024, plus any contributions or distributions during that period.

I just wanted to share that I had a similar situation last year with an S Corp sale and used taxr.ai to help me sort through the documentation. I was confused about how to handle the basis calculations and reporting requirements for a mid-year sale. I uploaded the purchase agreement and prior year returns to https://taxr.ai and their analysis helped me identify several issues I had missed. For your situation, they could probably clarify whether you need to make a Section 338 election, which might be relevant since you're dealing with assets (inventory) separately from stock. The system flagged this for me when I thought I was handling everything correctly - turns out I wasn't!

Just wanted to follow up on my experience with taxr.ai after our conversation. I decided to try it with a similar S Corp sale situation I was dealing with. I was honestly surprised by how helpful it was! I uploaded the purchase agreement which had some complicated terms about contingent payments based on future performance. The analysis broke down exactly how to handle the reporting between Form 6252 for the installment portion and Schedule D for the immediate payments. It even flagged a potential ordinary income recapture issue related to depreciated assets that I completely missed. The basis calculation guidance was especially helpful - showed me how to properly document the mid-year adjustment with a detailed walkthrough of Form 1120S and the corresponding K-1. Definitely saved me hours of research!

If you're still struggling with the IRS guidance on this, I'd recommend using Claimyr to get through to an IRS representative. I waited weeks trying to get clarity on a similar S Corp stock sale question last year before finding https://claimyr.com. Their service got me connected to an IRS agent in about 20 minutes when I had been trying for days on my own. I also found their video demonstration helpful: https://youtu.be/_kiP6q8DX5c For complex S Corp issues like yours, sometimes you need to speak directly with the IRS to get definitive guidance, especially when there are installment sales involved. The agent I spoke with walked me through the exact reporting requirements for my situation, which saved me from potentially making a costly mistake.

I need to eat my words about Claimyr. After posting my skeptical comment, I decided to try it anyway since I was desperate for answers about an S Corp basis adjustment issue similar to the original poster's question. It actually worked exactly as described. They called me back in about 35 minutes (longer than the 20 minutes mentioned, but still WAY faster than my previous attempts), and I got connected to an IRS business tax specialist. The agent clarified that for mid-year S Corp stock sales, they prefer to see a closing of the books method rather than prorating, especially when there's an installment sale component like in this case. The agent also confirmed that when inventory is separately valued in a purchase agreement like this, it should be treated as a separate asset sale from the stock transaction. Saved me from making a reporting error that could have caused issues for my client.

Something important that hasn't been mentioned yet - make sure you consider whether Section 1245 recapture applies to any depreciable property included in the S Corp stock sale. This can convert what would be capital gain into ordinary income. Also, did the selling shareholder have any suspended losses? Those can affect the basis calculation and potentially become deductible at the time of complete disposition of S Corp stock.

I'm curious how you're handling the continuing installment payments over the 7-year period. Does the corporation make these payments or is this the responsibility of the purchasing shareholder personally? This can have different tax implications.

Thank you all for the incredibly helpful advice! After reviewing everything, I'm going to: 1. Calculate an updated basis as of May 15th using a proper closing of the books 2. Treat the stock sale and inventory sale as separate transactions 3. Look into potential suspended losses and Section 1245 recapture issues 4. Verify whether this is structured as a cross-purchase or redemption This community has been amazing - you've given me much more clarity than I had before!

Great to see you have a solid plan moving forward! One additional consideration I'd recommend - make sure you document the valuation methodology used for the inventory portion thoroughly. Since the IRS often scrutinizes related-party transactions (even between unrelated S Corp shareholders), having clear documentation of how the $182k inventory value was determined will be crucial if questioned later. Also, when you're doing the closing of the books as of May 15th, don't forget to account for any distributions or guaranteed payments that occurred between January 1st and the sale date. These can significantly impact the final basis calculation. Feel free to update us on how it goes - these complex S Corp transactions are great learning experiences for all of us!

One more thing to keep in mind - you'll want to make sure the selling shareholder properly reports any built-in gains tax that might apply. Since this is an S Corp that may have previously been a C Corp, or if there were any asset contributions with built-in gains, there could be Section 1374 implications. Also, I'd recommend reviewing the purchase agreement carefully for any non-compete or consulting agreements that might be bundled into the transaction. These would need to be allocated separately and treated as ordinary income rather than capital gains. Given the complexity of this transaction, you might want to consider having a more experienced S Corp practitioner review your work before filing. The interplay between installment sales, basis adjustments, suspended losses, and potential recapture can get tricky quickly. Better to catch any issues now than deal with an IRS examination later!

For determining Section 1374 applicability, you'll want to check several key sources: 1. **Formation documents** - Look at the original articles of incorporation and any amendments to see if there was ever a C Corp election 2. **Form 2553** - This S Corp election form should show the effective date of S status 3. **Prior tax returns** - Review any 1120 (C Corp) returns that may have been filed before the S election 4. **Built-in gains tracking** - If the corp was previously a C Corp, there should be documentation of assets' fair market value vs. adjusted basis at the time of S election The 10-year recognition period for built-in gains starts from the S election date, so if the S election was made more than 10 years ago, Section 1374 likely won't apply. However, if there were any asset contributions after the S election where the contributed property had a basis less than fair market value, those could still trigger built-in gains issues. Also, don't forget to check if the corporation ever revoked its S election and then re-elected - this would restart the 10-year clock. The key is creating a clear timeline of the corporation's tax status history. Given all these complexities, having an experienced practitioner review is definitely the right call. These transactions have so many potential pitfalls that it's worth the extra cost to get it right!

For documentation of revoked S elections, you'd typically find this in the corporation's tax files as Form 1120S would show the final year of S status, and there should be a Form 1120 filed for any C Corp years. However, if the records are incomplete, you can request a transcript from the IRS using Form 4506-T to get the filing history. Regarding built-in gains tracking - corporations are absolutely required to maintain this documentation per Reg. 1.1374-8, but you're right that many don't do it properly or at all. If the documentation is missing or incomplete, you'll need to reconstruct it using: - Asset records and depreciation schedules from the S election date - Appraisals if they were done at the time of election - Financial statements closest to the S election date - Any available fair market value data from that time period If you can't reasonably reconstruct the built-in gains amount, the IRS may take the position that all gains are subject to the built-in gains tax, which is obviously not favorable. This is another reason why having an experienced practitioner review is crucial - they may know alternative approaches or have dealt with similar incomplete records situations. For your original S Corp stock sale, make sure to document your research process even if you conclude Section 1374 doesn't apply. The IRS likes to see that you considered all applicable provisions, especially in complex transactions like this one.

For comprehensive guidance on S Corp stock sales with installment components, I'd recommend starting with these key IRS resources: **Primary Publications:** - Publication 537 (Installment Sales) - covers the mechanics of installment sale reporting - Publication 542 (Corporations) - has specific sections on S Corp distributions and sales - Instructions for Form 6252 - detailed guidance on installment sale reporting requirements **Critical Code Sections & Regulations:** - IRC Section 453 and related regulations for installment sales - IRC Section 1367 for S Corp basis adjustments - Reg. 1.1368-1 through 1.1368-3 for S Corp distributions and basis rules - Rev. Rul. 89-7 specifically addresses S Corp stock sales with installment features **Additional Resources:** - PLR 200927013 provides guidance on mid-year S Corp stock sales and basis calculations - TAM 200733023 covers similar issues with installment reporting One thing I haven't seen mentioned yet in this thread is the potential need for a Section 453(d) election if the selling shareholder wants to opt out of installment treatment for any portion of the sale. This might be relevant if they want to accelerate recognition of losses to offset other gains. Also, don't overlook the potential applicability of Section 1202 qualified small business stock exclusion - if this S Corp meets the requirements, the selling shareholder might be eligible for significant gain exclusion on the stock portion of the sale. The complexity of your transaction really highlights why thorough documentation and research is so critical in S Corp dispositions!