Tax Guru – Ker$tetter Letter

Q:

Subject: Is an S corp transferable?

 

Tax Guru,

           Upon the sale or transfer of the business (assuming that it is an s corp. in the first place); do the new shareholders have to sign a new IRS 2553 or does it just remain in effect?

Thanks for the advice

A:

The original 2553 remains in effect until either formally revoked or if the corp fails to qualify for S status by violating one of the restrictions.

Assuming the new owners are not one of the ineligible types, and the total number of shareholders is still less than 100, the original S election will continue to be in effect.  The new owners will be obligated by the original 2553 even though they have not signed it.  This mean that they will have to include their pro-rated share of the corp’s income on their 1040s.

If the sale of stock is effective mid-year, how you allocate the income or loss to be reported on the K-1s is negotiable between the buyers (old shareholders) and sellers (new shareholders) and should be spelled out in the sale agreement so that there is no messy dispute when the 1120S is prepared.

I hope this helps.  A tax pro can help work with your particular situation.

Kerry Kerstetter