C-Corp Closing - retained earnings

C-Corporation is closing up shop due to retirement. The shareholders consist of a husband and wife who also ran the business. In preparing the final tax return, there remains about $75,000 in retained earnings. How are the remaining retained earnings treated as the corporation is closed out and the balance sheet zeros out? Any advice is appreciated!

R/E of no consequence on complete liquidation. But what assets are being distributed? That matters.

There were six pieces of equipment that were sold. Otherwise there are no additional assets being distributed other than some cash of about $20,000 that was in the bank account.

How is it that, once all the assets are distributed and all the liabilities are wiped out, you don't have Retained Earnings as a negative amount equal to the paid-in capital?

Basic accounting: Assets = Liabilities + Equity. If assets & liabilities are $0, then $0 = $0 + Equity, meaning that Equity has to total to $0. And probably all you've got in equity is paid-in capital (credit balance) and retained earnings (which must have the opposite debit balance).

So what this means is that you haven't yet accounted for stuff like recognizing losses on some of the assets, recording dividends to the shareholders, etc. (and on the other side of things, cancellation of debt income for liabilities that will be wiped out or whatever).

No cheating. If you have 75k in retained earnings, then they distributed it, likely as a note from s/h or some such thing. Now you recognize income on the 75k. This is a C corp. So it now will issue a dividend for the 75k, which gets picked up o nthe 1040.

And here I thought I understood reading and accounting. As to reading, where did OP say all the assets are distributed and all the liabilities are wiped out. Quite the contrary. OP asked How are the remaining retained earnings treated as the corporation is closed out and the balance sheet zeros out? and clarified There were six pieces of equipment that were sold. Otherwise there are no additional assets being distributed other than some cash of about $20,000 that was in the bank account.

So the C corp. has about $20k in cash, and equity of that same amount that is split between r/e and capital stock/paid-in capital.

So, the cash distributed would constitute a liquidating dividend? Doesn't that go against basis in the stock?

Again, it's a C corp. It MUST declare divs on the retained earnings. This is the double tax you may have heard about. Whether there's cash for it or not.

Unless and until we get more or different facts, this is so simple I can't believe we're having questions about it.

Yes, the cash distributed (which is a distribution in complete liquidation, not a dividend) "goes against" basis in the stock.

But that's the shareholder, and has nothing to do with the corporate accounting.

Please see section 331 and, for general knowledge in the area, I also recommend sections 301, 302 and 316.

JR1, that is a huge overstatement. Huge.

Is it? The retained earnings cannot just go *poof*...which is often hoped.

Yes it can, and it does all the time. If the corp. uses it for, say, equipment, how and why would they also distribute it as dividends?

IN OP's facts, all opersations have ceased, all assets have been sold, all corporate level "double tax" has been paid.

If there is $75,000 in retained earnings and $20,000 in cash, we need to know what account has the remaining $55,000 in it in order to help you close out the balance sheet.

Yes we do. OP implies but needs to clarify that there is also cash from selling the equipment. Or a loss on such sale that has yet to be closed to r/e.

Professor, you have me confused. If there's still 75k in retained earnings, then all double tax has NOT been paid, or else it would be 0. When you're done and all you have left is that, some cash, and I'll bet your money a NR S/H to balance, then you declare the div, issue the 1099DIV and now you're done. What am I missing?

JR1, it would be reported as a liquidating distribution on the 1099-DIV instead of a dividend. That amount is then used to calculate the gain/loss on the sale of the stock, instead of being taxed as a dividend.

Oh. Thx. See under: lack of experience in C corps....

Or read 331(a) and (b).

Why would I do that??? LOL.....do you give extra credit?!

Ordinarily, when a C corporation makes a distribution to a shareholder, the shareholder would treat the receipt as follows:


General rule: Effect on Shareholder

1. first, as dividend income, to the extent of the shareholders' share of section 312/section 316 "earnings & profits" (E&P). Although E&P is not defined in sections 312 and 316, E&P is often considered to be analogous to the financial accounting concept of "retained earnings".

2. next, as a reduction of the shareholder's basis in the corporate stock, until the remaining basis amount is zero.

3. finally, to the extent that the distribution amount exceeds the sum of items 1 and 2, as a gain on sale of the corporate stock.

See, generally section 301.


General rule: Effect on Corporation

Ordinarily, the corporation would treat the same distribution as a gain on sale of the assets distributed. See section 311(b)(1).


Time Out, Green Bay!
However, the above rules do not apply here. The special rules for complete corporate liquidations apply.


Special rule: Effect on Shareholder; Complete Corporate Liquidation

This is a complete corporate liquidation. For the shareholder in this case, the E&P of the corporation does not come into play. Instead, the shareholder treats the receipt of the distribution as full payment in exchange of the stock, per section 331. Section 301 does not apply.


Special rule: Effect on Corporation; Complete Corporate Liquidation

Because this is a complete corporate liquidation, the corporation treats the distribution as a gain on the sale of the assets distributed -- as a sale at fair market value, under section 336.

Not discussed here: The special exceptions to the special rule, etc.