How do I report a change in ownership of an S Corp? Originally (2012) the S Corp was set up with 2 owners each 50% owners (Father and Son). Since Jan of 2013, the son is the sole owner at 100% ownership. We have filed an extension for 2013 but are now ready to file. Who do we need to report this change to? Is there a form to report this change to the IRS? What about NYS? Please advise. Thank you and have a great day.

How do I report a change in ownership of an S Corp? Originally (2012) the S Corp was set up with 2 owners each 50% owners (Father and Son). Since Jan of 2013, the son is the sole owner at 100% ownership. We have filed an extension for 2013 but are now ready to file. Who do we need to report this change to?=======>>>>>> The way you change ownership is to transfer the stock in the corp from him to you. You would then cancel the old share and issue new shares to you in his place. On the tax returns you would then show the income or loss from the S corp as your profit or loss. When closely related parties are changing the ownership of an S corp, a CPA / an IRSEA should be consulted to ensure that the transaction uses a fair market value purchase price that could be supported in the event of an IRS audit. The corporation also will need to update its record book to reflect the change in share ownership.
Note; Changing ownership in an S corp is possible but it must be done according to the agreements and contracts in place at the time of the transfer of ownership; the 1120S should reflect the actual ownership of shares. Your corporation should( generally, small S corps do not have it) have shares or an Agreement. You would transfer the one share or modify the agreement to represent the new ownership percentage.However,there is a special rule called a related party transaction that is a business related transaction conducted between two parties that have a relationship with each other. Such transactions are legal, but they can create conflicts of interest and there are certain circumstances where they will not be allowed. Companies that are publicly traded are required to disclose related party transactions on their financial statements. For companies with a legal requirement to disclose, a related party transaction can occur between a company and a major shareholder, officer, director, or family member of any of the previous. Special relationships are enjoyed between companies and people in all of these classes. Companies usually assemble panels to make decisions about proposed related party transactions to determine whether or not a transaction is legal and justifiable.For example, as you trade capital asset to a related party, ordinarily NO gain or loss is recognized (under the usual rules for like-kind exchanges ). However, if the related party, father/son, sells the capital asset he received within two years, both parties will be taxable on any gains you deferred through the exchange. This two-year rule does not apply if the sale occurred because of the death of either related person, an involuntary conversion (due to casualty loss, condemnation, etc.), or if the parties can establish that the main purpose of the exchange and later sale were not mainly designed to avoid taxes. So, if you sell capital assets to a close family member, or to a business entity that you own or control, you might not get all the benefits of the capital gains tax rates, and you might not be able to deduct all of your losses,depednsing on the situation.
You may be able to eliminate related party transaction issues by changing the ownership of the related party such as transferring or disposing of interests in shares in the S corp to an unrelated third-party in order to get the related party's ownership interest below the 50% level. Things considered when making a decision about a related party transaction include the benefit to the company, as well as the other party, along with the value of the transaction and the nature of the transaction. If the company suspects that a conflict of interest may be created, it will not go through with the transaction. Likewise, if transactions appear to be illegal business practices, the company will not move forward. It appears that the constructive ownership rules apply in determining the ownership of stock of the S corp; for example, under the law you, a son, are considered to own constructively all stock actually owned by your father.
ALSO, if your father "turn overs" all of his shareholder interest to you, he MAY be creating a taxable gift. If your father owns, say, 200 shares in the S-corp and the value of each share is $100, then your interest would total $20K. If he gave you 200 shares, that would represent a gift of $10K, which would certainly exceed the annual gift tax exclusion amount of $14K in effect in 2013.Your father needs to file Form 709.


Is there a form to report this change to the IRS? What about NYS? ==============>>>>>> In the state where the business is incorporated, you will have to submit documentation to the Secretary of State detailing the changes. For tax purposes, the S corp needs to close the books and issue K-1s to the old shareholders based on the business’ financial activity up until the sale, and then issue K-1s again at the close of the year to the new shareholder.I guess you can contact the Dept of Rev of your state for more info in detail.I guess you need to consult with a licensed attorney in your area , NYS, to ensure all required paperwork is properly filed. If you are buying your S corp shares, consult with atax attorney , a CPA/an IRSEA to ensure that all returns are appropriate filed
you can contact the Dept of taation and Fin. of NYS for more accuarate info on your biz issue.

We are in a similar situation, we had a shareholder back in 2012 who owned shares of our company but sold on jan 2013 to another shareholder. we already made changes to the k-1 showing him at 0% and our corporate books and with secretary of state? Is there anything else needed? And what happens if one day he comes back to us saying he have shares, besides the internal docs we have one file, would the new filing with secretary of state and a final k-1 showing him at 0% ownership be sufficient? Because we are afraid in 4 years down the line if we make good money he will come back saying he owned shares.

We are in a similar situation, we had a shareholder back in 2012 who owned shares of our company but sold on jan 2013 to another shareholder. we already made changes to the k-1 showing him at 0% and our corporate books and with secretary of state?====>> I guess it depends.Your financial statements will produce the actual value of the stock at the date of sale. The shareholder still needs to file a tax return showing his interest in the corporation up to the sale date and then the corporation needs to take back the stock at fair market value from him.For example, assume when the shareholder A sold his shares to another shareholder B, A’s original inside basis was $1k. The shareholder A now has a sale of a security for $1k, with a basis of $10K(bal in his AAA/ share basis) , producing a $9k loss./on his Sch K1..The treatment of the loss as capital or ordinary is based on various circumstances. For example, were the shares bought for cash at the company's inception? Could this generate an ordinary loss? Maybe. But the $10k basis "dissapears" for tax purposes when the shares are sold to shareholder B. You should record this in the minutes of the meetings and have him surrender his stock certificate at the date of sale however, unless the corporation repurchased the stock this transaction was outside of the books of the corporation.

Is there anything else needed? And what happens if one day he comes back to us saying he have shares, besides the internal docs we have one file, would the new filing with secretary of state and a final k-1 showing him at 0% ownership be sufficient? Because we are afraid in 4 years down the line if we make good money he will come back saying he owned shares.=====>>>>>>>>>> I think so as his actual ownership of the S corp share was not 0%. I guess you need to file amended return. Reasons to amend a corporate tax return include discovering mistakes that were made by corporation owners or accountants, locating misplaced financial information that can change your corporate tax liability, and replying to an audit by the IRS. Corporate tax returns can be amended very easily if further information is required or discovered.i guess you can contact a tax pro in your local area for more accurate info on the issue.

Hi Thanks for prompt response.
Well his ownership percentage in tax year 2012 was 35% but when we filed taxes in 2014 for tax year 2013 we put final k-1 and put the ownership percentage to 0% because he had no more shares. Is this sufficient? We also confirm on his tax return that he sold shares for a short term capital gain

#1; I think so aslongas his actual ownership of the S corp share was 0%;however, as mentoned previously, when discovering mistakes that were made by you, a corporation owner/shareholder, or another owner/shareholde etc , you need to amend a corporate tax return by locating misplaced financial information that can change your corporate tax liability, . i guess you can contact a tax pro in your local area for more accurate info on the issue.


#2;Aslongas his actual ownership of the S corp share was 0%, then no need to amend the 1120S;Since S corps can issue only common stock, recording of stock sales must follow accounting rules for sale of common stock.The sale of the stock is treated the same way as the sale of its underlying assets and liabilities. The purchasing shareholder will increase his/her basis in the S-Corporation by the purchase price.Things like inventory, receivables, and other ordinary income property would result in ordinary income/loss to the extent one shareholder purchases them from the other in an arms' length non-related party transaction (just as though sold to a customer), but other than that, the selling shareholder will end up recognizing capital gains or losses depending on his/her individual basis in the shares sold, generally speaking.as you can nsee, the capital gains tax rates are determined by the type of investment asset and the holding period of the asset.his capital gains will also be subject to the state income taxes.Many states do not have separate capital gains tax rates. Instead, most states will tax your capital gains as ordinary income subject to the state income taxes rates.