S Corp Stock Sale - Basis immediately before sale

Technical topics regarding tax preparation.
#1
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I'm probably overthinking this one...

100% S Corp owner. Has basis at beginning of year of $100,000. Sells 50% of the S Corp stock on 7/1 for $120,000. No redemption, sale happened outside of the corp itself. The corporation had net income at the end of the year of $200,000

I know the basis used to calculate the gain on the sale of the stock is the basis immediately prior to the sale. But what exactly is considered the basis immediately before the sale? Does the income from the year of sale factor into the basis for the time he was 100% owner?

We are not doing a closing of the books election, income is being allocated pro-rata/days owned.

My though it to use the beginning of year basis (50% of $100,000), against the proceeds of $120,000, for a LT gain of $70,000.

But again, what does "immediately before the sale" mean? Should any of the income prior to 7/1 be allocated to the basis used in the gain calculation?

Thank you all in advance.
 

#2
Nilodop  
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Basis - Beginning 50, add prorated income 100 = 150, sale price 120, loss 30.
 

#3
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Nilodop wrote:Basis - Beginning 50, add prorated income 100 = 150, sale price 120, loss 30.


Hey Nilodop,

What are you basing the prorated income on? In my example, the pro rata ownership for the original owner during the year of sale would be around 75% (100% for the first part of the year, and then the 50% for the 2nd part of the year). So the total pro rata income at the end of the year for that shareholder would be around $150,000.

I'm thinking you are looking at the prorated portion of ownership from the time he was the 100% owner (((183 days / 365 days) x 100%) x $200,000)), but I just wanted to confirm.
 

#4
Nilodop  
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Consider it confirmed. He sold halfway thru the year, not at the end of the year. I sure hope he actually gets that income.
 

#5
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Nilodop wrote:Consider it confirmed. He sold halfway thru the year, not at the end of the year. I sure hope he actually gets that income.


Haha, this was just an example. The real life version was not so clean, and the income not nearly as high.

Thank you for following up.
 

#6
Nilodop  
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#7
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Should any of the income prior to 7/1 be allocated to the basis used in the gain calculation?

Yes, of course it should. If you don’t attach current year basis adjustments to stock that was sold, you’d end up pushing those adjustments onto stock that is retained, which makes little sense.
 

#8
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Nilodop wrote:Why won't they make an election? https://www.thetaxadviser.com/issues/20 ... ry-09.html


Coincidentally, we ended up going that route. I'm finishing up the allocations right now. Client was pushing for the return to be finalized, they just wanted it done, but I showed them the closing of the books election would work out better.
 


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