2020 Final S corp return

client went out of business in 2020 due to covid

S corp - $0 AAA stock basis $0 shareholder loan receivable $3 million (grew over the years) with offsetting $3 million in payables that will not be paid

How is the shareholder loan receivable taxed to shareholder -- Is it LTCG with 0 basis? Where is it shown on K1?

What do we do with the unpaid payables on the final return?

thanks

Cash or accrual basis?

accrual - thanks

You'll end up with income from the unpaid liabilities, which will provide basis to distribute the shareholder loan and bring the balance sheet to zero.

To be candid, your client dug this hole for themselves by accumulating a shareholder loan that appears to really be distributions. That's a going to be lot of tax without any cash, but that's why I don't allow people to accumulate shareholder loans like this. I don't want to be explaining what you will need to explain to your client.

so final year S corp has 3 million in income (amount of unpaid payables) on K-1?

now I am left with a 3 mill loan receivable and 3 mill in income without any cash.

does the 3 mill loan receivable go on K-1 as LTCG?

Does client end up with 3 mill LTCG for loan & 3 mill other income for the unpaid payables? - total of 6 mill income?

thanks - it is a big mess

The $3M in income provides the shareholder basis of $3M. Then the $3M shareholder receivable can be adjusted to a distribution, which brings basis back down to zero.
The $3M previously shown as a SH receivable will show up on the K-1 as a distribution.

thank you very much

Basically, he's now paying tax on money he's taken out. Simple explanation. He used other people's money for himself...so he has to pay tax on it.

thank you

Captcook - by treating this as a SH loan over the years doesn’t it likely save the TP tax. Alternatively, TP would have recognized capital gains on distributions in excess of basis over the years, now has $3M of ordinary income on the cancellation of the liabilities (under either scenario) and then would have had a $3M capital loss on the stock disposition that, unless TP has significant cap gains, is probably of minimal value.

Yeah, but no one tends to plan to not repay it from profits that are distributed against it. Granted, when it gets this tall, like the good Cap'n mentions alternatives need to be found....

I would have no hesitation telling this client they have to recognize $3m of income. They got $3m of somebody else’s money and didn’t pay it back.

Captcook - by treating this as a SH loan over the years doesn’t it likely save the TP tax.

In a very short-sighted way...I guess.

Alternatively, TP would have recognized capital gains on distributions in excess of basis over the years, now has $3M of ordinary income on the cancellation of the liabilities (under either scenario) and then would have had a $3M capital loss on the stock disposition that, unless TP has significant cap gains, is probably of minimal value.

After distributing the accumulated shareholder loan, there is no basis left over for a capital loss...period.

The broader issue here is that I never let clients accumulate SH loans for this reason. It becomes a habit and some people take that habit to very dangerous levels, which is where this client is. It's really sad and I've seen it many times. I've fired clients who insist on doing this. I sleep better at night because I'm not going to facilitate/enable this behavior.

There wouldn’t have been an accumulated SH loan if the money out was treated as distributions in past years.

There wouldn’t have been an accumulated SH loan if the money out was treated as distributions in past years.

My apologies, I misread your post.

In practice, insisting this shareholder pay capital gains on these distributions will minimize or eliminate the practice and remove the issue from being an issue. Our facts here suck and were clearly not planned. With that in mind, it's not worthwhile, IMO, to parse this out as a "strategy".

Hi, Mike,
Call my cell, 352-512-2372 and leave a message. I'll get back to you. I'll tell you a story that worked for me.
Steve

I’m not following the balance sheet - is the shareholder loan an asset or liability of the corporation? What is equity before liquidation? Did the corporation essentially fund a loan to the shareholder(s) with unpaid vendor payables?