Thinking out loud here…
Not sure if we’ve also got a situation involving a below market purchase price. But let’s say we do. Let’s say FMV is $100k and the EE will pay $40k. Let’s also say basis is $75k to the shareholder.
The situation might be case where we have a deemed transfer of the property to the corp by the shareholder, as a capital contribution. Corp takes the property with a $75k basis.
Debit Receivable $40k, debit compensation expense $60k, credit basis $75k, credit gain $25k. Net P&L effect to corp is negative $35k.
Then I think we’d have to debit Shareholder Distributions for the $40k and credit the Receivable off the books, since the Shareholder will be personally receiving these funds.
If we look at Shareholder’s stock basis, it would go up by the $75k basis contributed, then it would go down the net negative $35k. Then it would go down by the $40k distribution. Net impact is $0.
When the shareholder collects note payments, they wouldn’t be taxable, since the shareholder would have a $40k basis in the note.
Yes, this could get really messy. And I’ve ignored any imputed interest.
Client will not want to amend 2018 so maybe a written agreement effective for 2019?
If you go that route, you’d obviously leave ’18 as a pure rental arrangement. But then we have the issue of the EE perhaps getting credit, towards the purchase price, for the “rent” he paid in 2018. Let’s say that was $12k. What you could do here is alter the above numbers: The $100k becomes $88k. The $40k becomes $28k. We’d still have $60k of compensation income/expense. This might be the only way to “fix” things if ’18 won’t be amended. The other option is to say that the $12k paid in 2018 was really option money…that the shareholder simply reported improperly on his 2018 F1040. We’d have to think that all the way through, though.