S-Corporation Stock Redemption Sale ~ Help

[cpazott]

Please be nice.  Just looking for some guidance.

Client owned 150 shares in an S-Corp. (He was a 3% shareholder) 

The S-Corp purchased his shares in 2021 for $65,000

Basis $186,000 ($35,000 buy in, balance undistributed income)

Received "deferred compensation" of $120,000 in 2021 on Form W2 for his share of uncollected receivables.

This can't be as simple as $120,000 in ordinary income and a $121,000 capital loss limited to $3,000. Tax disaster. 

He did not use an attorney or ask me about the arrangement.  

[IRonMaN]

Did he sell stock or assets?  You don't provide a lot of details as to what actually transpired.

[Terry53029]

Everyone here is always "nice" 😁 Like @IRonMaN said need more details. I don't quite understand your " Received "deferred compensation" of $120,000 in 2021 on Form W2 for his share of uncollected receivables." S Corps are pass through entities, and do not issue W2's

[cpazott]

My client was part of a large medical practice.   He owned 3% of the shares.  He was ready to retire and the S-Corp purchased the shares back from him.

Thank you in advance for any advice that you can offer.

[cpazott]

Hi Terry,

Yes S-Corporations do issue W2s all the time.  Matter of fact, they are required to pay reasonable compensation to the shareholders.  This client was a 3% shareholder in a large medical practice and was ready to retire.  The S-Corporation purchased his shares back for $65,000.  The $120,000 paid over six months was coded on his W2 as deferred compensation and was in addition to his regular compensation through 04/30/21 (the date of the stock redemption).  He also received a K-1 for the year for his share of profits through 04/30/21.  

Thank you in advance for any insight on the matter.

[IRonMaN]

Then it is as simple as you originally posted.  A loss on the sale of his shares and ordinary income by way of the W-2.

[Terry53029]

Sorry I was interrupted, and didn't get to finish my reply. Of course S Corps issue W2's, but only for shareholders services. Deferred comp is only something I have seen C Corps issue to high paid executives as a form of nonqualified retirement 

[BobKamman]

Those who accuse me of not playing nice at times, will be disappointed that I passed my Covid test Saturday at the Paris pharmacy across the street from the Airbnb, and after 24 hours and two flights yesterday I am trying to remember some of what I managed to forget about taxes the last couple weeks in Spain and France.  I have a client who sold S corporation stock back to the company -- but at a profit.  I was wondering if Section 1244 applied, but that's only for losses.  Might help your client, though.  Another client sold a medical practice, where insurance reimbursements often take six months or more to be paid after services are delivered.  I wouldn't call a settlement of these amounts "deferred compensation," but I would agree with putting it on a W-2 and telling the former owner/shareholder, "this is what you earned before you retired, we're just paying it to you now in anticipation of what we know will be collected later."

[cpazott · Accepted solution]

Bob,

THANK YOU!

Wow, my client meets the requirements of Section 1244.  Went from owing $6,000 to a refund of $26,000. 

In the process of researching and reporting it, I found nothing in the IRS publications.  Proseries has the reporting option buried and I do feel it should be a prompt under the "sale or complete disposition" sheet. 

My client will be thrilled.  As cynical as people can be about the IRS, I did have a feeling that the outcome I had come up with was inequitable and the intent of Congress was not to have a 40 years capital loss carryover ($3,000 per year) for undistributed ordinary income received, taxed and added to his basis.

Thank you and God Bless.  I hope you enjoyed France and Spain.  I am heading to Paris and London in October and hoping the CDC drops the testing.  I am reading about people flying to Canada and driving across the border to avoid the requirement.