Liquidating vs nonliquidating distributions

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If the shareholder has multiple bases in her stock, the exact amount of the gain or loss will depend on whether there are single or multiple liquidating distributions.

To the extent that the shareholder has basis in the S corporation stock, distributions to the shareholder are tax free.

Any taxable amount the investor receives is reported on Schedule D, the capital gains and losses statement that is filed with the IRS form 1040 during yearly tax filings. When he receives a cash liquidation payment of , of that is a return of capital and is not taxable, while is the gain and is taxable. When she receives her payment of , it does not cover his original cost basis in the stock.

Payments in excess of the total investment are capital gains, subject to capital gains tax.

S corporations with accumulated earnings and profits should take advantage of this distinction by clearly identifying liquidating distributions in the documents authorizing the liquidation.

If the corporation distributes the assets in kind to a shareholder under a plan of liquidation, it is treated as having sold the assets to the shareholder for fair market value.

The corporation will recognize gain or loss if the amount realized (or the property’s value) differs from the corporation’s basis in the distributed asset.

Amounts below investors' cost basis are reported as capital losses.

Credit unions send this sort of distribution to their depositors when they are liquidated, as well.

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