Because no cash is received, the S corporation recognizes no gain, and the shareholder’s basis remains zero. Since the installment obligation is the only asset distributed in liquidation, the shareholder takes a zero basis in the receivable, and all payments received are taxable.

How is an installment sale reported in SEC 453?

The entire $1,000 gain is eligible for installment sale reporting under Sec. 453. The realized gain on the asset sale is $1,000, but none of the gain is recognized. After the asset sale, the S corporation adopts a plan of liquidation and distributes the note in liquidation.

What are the rules for an installment sale?

Under these rules, the note’s distribution is treated as a disposition of the installment obligation. The S corporation recognizes gain of $1,000. The shareholder recognizes no gain or loss on the distribution, as the basis in the S corporation is increased to $1,000 by virtue of the gain recognition, and takes a $1,000 basis in the note.

Is the sale of a S corporation tax free?

As a result of the basis adjustment, the deemed liquidation is generally tax-free to the S corporation shareholders. The purchaser is treated as having formed a new subsidiary corporation which purchases the target S corporation’s assets for fair market value.

Do you pay capital gains on sale of S Corp?

Capital Gains Taxes on the Sale of an S Corporation. The income earned by an S Corp is passed through, which means shareholders of the company will report this income in their personal tax returns. Similarly, when an S Corp is sold, the proceeds of the sale are passed through.

What was the value of an installment sale?

In my example, the restaurant client (two shareholders 50-50) sold the business for $140,000 on an installment sale. They had tangible and intangible assets with net book value of about $74,000.

What are the rules for reporting installment sales?

Reporting the repossession. Installment method not used to report original sale. Basis in installment obligation. Gain or loss. Installment method used to report original sale. Basis in installment obligation. Gain or loss. Basis in repossessed property. FMV of repossessed property. Mandatory rules. Conditions not met.