An S corporation is a business with 100 or fewer shareholders that has the liability protection of a corporation but is taxed like a partnership. This means that the owners include a portion of the corporation’s profits and expenses on their personal tax return, based on how many shares they own. Since the corporation must provide all of the owners’ information regarding what to include on their returns and to ensure that there are no more than 100 shareholders at any time, the S corporation must keep track of who owns its shares. A sale of S corporation stock takes place anytime a shareholder surrenders stock in exchange for property or a written promise to pay the shareholder in the future.
Update the S corporation's stock ledger. A corporate stock ledger details who owns the S corporation’s shares. Each ledger might use its own notations, but the ledger should detail who transferred the stock, how much was exchanged, and the name of the new owner. The contact information of the new owner should also be included. This includes the owner’s phone number and address.
Issue K-1s to the former and new shareholder. A K-1 is issued by the S corporation and details all of the income and losses that a shareholder must include on his personal tax return. The former shareholder must include all income and losses accumulated by the S corporation prior to the sale of the shares. The current shareholder must include all income and losses accumulated by the S corporation after the stock sale.
Record the value of the property you surrendered to obtain the stock if you are the new shareholder. How much you paid for the shares is the value of your basis in the S corporation’s stock. The basis will be used to determine how much tax you will pay when you sell your shares in the future. The amount you should record is the exchanged property’s market value, or how much you could get for the assets if you sold them for cash as of the day of the sale.
Complete and file a Schedule D tax form detailing any gains or losses from the stock sale if you are the selling shareholder. A taxable capital gain is recognized if the shares are sold at a price greater than the shareholder’s basis in the S corporate stock; a capital loss occurs if the shares are sold at a value less than the shareholder’s basis. Schedule D of a tax return adds all capital gains and losses you recognized during the year to determine what tax you will need to pay on those transactions. Generally, any long-term gain from assets held longer than a year is taxed at a rate of 15 percent.
Tips & Warnings
Consider hiring professional help when preparing your tax returns if you are an S corporation shareholder.
References & Resources
- Internal Revenue Service: S Corporations
- Internal Revenue Service: Publication 550 – Investment Income and Expenses
- AllBusiness: The Stock Ledger of a Corporation
- Internal Revenue Service: Shareholders’ Instructions for Schedule K-1 (Form 1120S)
- Internal Revenue Service: Topic 703 – Basis of Assets
- Internal Revenue Service: Topic 409 – Capital Gains and Losses