Amend 2021 or Report on 2022

Technical topics regarding tax preparation.
#1
CathysTaxes  
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Client's final 1120 for calendar year 2021 for her c corp was filed after her 2021 1040. Form 966 was not filed and 1120 had a loss. I did not prepare this return. She personally sold assets in 2021 OOPS, SHE SOLD ASSETS IN 2022, the 1120 did not reflect that the assets were distributed to her.

Should I amend the 2021 1040 to report the loss (corporation owed her money) and report the asset sale on 2022 1040, or can I report both on 2021? The asset sale is less than the Loans from Shareholders, so she's not going to owe tax.

Thanks
Last edited by CathysTaxes on 13-Mar-2023 10:15am, edited 1 time in total.
Cathy
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No need to bring 2022 into it when it all happened in 2021 (other than potentially dealing with a carryforward from a capital loss or NOL).

No need to amend 2021 for the C corporation when the amount of tax isn't changing.

I would be amend the individual return for 2021 to claim the loss on her investment in the C corporation (based on the real facts, not based on anything that was incorrect on the 1120).
 

#3
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beardenjv wrote:No need to bring 2022 into it when it all happened in 2021 (other than potentially dealing with a carryforward from a capital loss or NOL).

No need to amend 2021 for the C corporation when the amount of tax isn't changing.

I would be amend the individual return for 2021 to claim the loss on her investment in the C corporation (based on the real facts, not based on anything that was incorrect on the 1120).

Thanks. I did make a booboo in my OP (which I corrected). She personally sold the assets in 2022. That would mean 2021 would have a loss on the closing of the corporation, and the 2022 sale would be a gain.
Cathy
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So the assets coming out of the corporation in 2021 to the shareholder would be at fair market value as of 2021.

Did the FMV of the assets increase between 2021 and 2022?
 

#5
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beardenjv wrote:So the assets coming out of the corporation in 2021 to the shareholder would be at fair market value as of 2021.

Did the FMV of the assets increase between 2021 and 2022?


Unfortunately, the CPA did not do a form 966 to specify disposition of assets, so I don't know FMV and neither does client. The 1120 form 4597 listed basis 40,487 and depreciation of 40,487. The 1120 showed a loss of $6369, I doubt it for the FMV of the equipment would be more than that. The new owners received the equipment, her lease, and her phone number so any of her old clients still using the old number would be going to them. She did the sale on June 15th, so she used the assets for 5.5 months (she is now renting from them). Less selling expenses, client received $18,400. We are talking about a hair salon, so there's the hair washing station, reception desk, reception chairs, and I believe four hair stations. She tried just selling the equipment, but no takers. She was in seventh heaven to get these buyers. They pretty much are getting rid of her equipment, they just wanted to location.
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So it sounds like to me that the FMV when the corporation transferred the assets to her in 2021 was at least as high as the selling price in 2022, maybe a bit higher. Therefore, there's no gain in 2022, and there may be a bit of a loss.

Why would the $6,369 loss on Form 1120 (which is mostly based on the total amount paid by customers minus the total of all the various business expenses) have anything to do with the value of the equipment?
 

#7
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beardenjv wrote:So it sounds like to me that the FMV when the corporation transferred the assets to her in 2021 was at least as high as the selling price in 2022, maybe a bit higher. Therefore, there's no gain in 2022, and there may be a bit of a loss.

Why would the $6,369 loss on Form 1120 (which is mostly based on the total amount paid by customers minus the total of all the various business expenses) have anything to do with the value of the equipment?


If the CPA had booked a distribution to the shareholder for the FMV of the equipment, wouldn't the gain on the 'sale' reduce the loss?

If the assets were distributed as a basis of zero, wouldn't her basis when she sold it be zero, so everything is a gain? 2021 would have a short term capital loss due to Loans to Shareholders and 2022 have a short term capital gain?
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The corporate distribution is taxed at the corporate level. Regardless of whether the corporation reported that gain, she takes a FMV basis. It sounds like she is also entitled to a loss in 2021, which she may want to take via a 1040X. Unless you have reason to believe the property value changed, show no gain on the sale in 2022.
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CathysTaxes wrote:If the CPA had booked a distribution to the shareholder for the FMV of the equipment, wouldn't the gain on the 'sale' reduce the loss?

Are you being engaged to amend the corporate income tax return for the dissolved corporation to include a gain on the property distribution so that there can be a balance due that the corporation can't afford to pay? That kind of seems like a waste of time.

CathysTaxes wrote:If the assets were distributed as a basis of zero

No. Steve is correct, the shareholder's basis in the distributed equipment is FMV. The corporation has a gain, but see my comment above on that, and whether or not the corporation does what it's supposed to do doesn't affect the shareholder having basis equal to FMV.

CathysTaxes wrote:2021 would have a short term capital loss due to Loans to Shareholders

I would have guessed that her holding period in the stock and the loan was more than 1 year, making it long-term. Or maybe she qualifies for it to be an ordinary loss under Sec. 1244.

CathysTaxes wrote:and 2022 have a short term capital gain?

Or more likely a short-term capital loss on the sale of the equipment, because I think probably the FMV of the equipment went down, not up, between 2021 and 2022. Or it kind of sounds like she's still using that equipment in some sort of business in 2022 perhaps? I wasn't clear on that. So maybe selling equipment used in business in 2022 would be an ordinary loss on Form 4797.
 

#10
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beardenjv wrote:
CathysTaxes wrote:If the CPA had booked a distribution to the shareholder for the FMV of the equipment, wouldn't the gain on the 'sale' reduce the loss?

Are you being engaged to amend the corporate income tax return for the dissolved corporation to include a gain on the property distribution so that there can be a balance due that the corporation can't afford to pay? That kind of seems like a waste of time.

No. I would only amend 2021 1040 to show a long term loss on the closing of the corp.

CathysTaxes wrote:If the assets were distributed as a basis of zero

No. Steve is correct, the shareholder's basis in the distributed equipment is FMV. The corporation has a gain, but see my comment above on that, and whether or not the corporation does what it's supposed to do doesn't affect the shareholder having basis equal to FMV.

Ok, good to know. Use a FMV even not worry about the 1120.

CathysTaxes wrote:2021 would have a short term capital loss due to Loans to Shareholders

I would have guessed that her holding period in the stock and the loan was more than 1 year, making it long-term. Or maybe she qualifies for it to be an ordinary loss under Sec. 1244.

Yes, she owned corporation for over ten years.

CathysTaxes wrote:and 2022 have a short term capital gain?

Or more likely a short-term capital loss on the sale of the equipment, because I think probably the FMV of the equipment went down, not up, between 2021 and 2022. Or it kind of sounds like she's still using that equipment in some sort of business in 2022 perhaps? I wasn't clear on that. So maybe selling equipment used in business in 2022 would be an ordinary loss on Form 4797.


She used the equipment for 5 months. Now her lease agreement with the new owners allow her to still use the equipment.

Thanks
Cathy
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#11
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Update. Majority of the equipment are built in fixtures (do built in fixtures have to be at FMV) and per her former CPA, the Loans from Shareholders actually was her equity.
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If the fixtures stay with the third party landlord, then I would treat those as abandoned by the corporation and not distributed to the shareholder.
 

#13
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beardenjv wrote:If the fixtures stay with the third party landlord, then I would treat those as abandoned by the corporation and not distributed to the shareholder.


Thanks
Cathy
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The landlord gets the benefit of the improvements without gain. It's a loophole.
Steve
 

#15
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gatortaxguy wrote:The landlord gets the benefit of the improvements without gain. It's a loophole.

Thanks
Cathy
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