Tax consequences of liquidating a corporation

The consequences of distributions to the shareholders and the corporation are discussed further.Shareholders in an S corporation must keep careful track of their tax basis.Basis Computations During a Loos Year A net loss (not including distributions) first reduces the basis for stock, and then reduces the basis of debt owed to the shareholder by the corporation, if any.Under the proposed regulations, a shareholder's stock basis at the end of a current year that is available to absorb losses is increased by the amount of the shareholder's share of the corporation's separately and non-separately stated income items.The Timing of Basis Adjustments All basis adjustments are deemed to occur on the last day of the corporation's tax year or on the date the shareholder sells his or her stock, if earlier.Income and loss items affect basis first, followed by distributions.The proposals list an ordering rule for the adjustment, either increases or decreases, of stock basis.They also include provisions on the timing of basis adjustments, basis computations during a loss year, computation of individual stock basis and the categorization of debt as basis.

Many S shareholders have two investments in the corporation - the investment in corporate stock and loans made to the corporation.Since losses flow through on the basis of the percentage of stock ownership, acquisition of additional stock will also increase the shareholder's proportionate amount of losses.In addition, a loan from a shareholder to the corporation gives basis to the lending shareholder.The shareholder's oil and gas depletion deduction; c. Non- separately computed losses that pass through; and e. Reducing stock basis for non-deductible items prevents a shareholder from converting a non-deductible expense at the corporate level into a deductible expense when stock is sold or a liquidating distribution is received.Distributions in excess of basis are treated as gains from the sale of stock.

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