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Distributor's Link Magazine Summer 2018 / Vol 41 No3


80 THE DISTRIBUTOR’S LINK Roman Basi Roman Basi is the President of The Center for Financial, Legal & Tax Planning, Inc. Roman graduated from Milliken University obtaining a Bachelor’s of Science Degree with a minor in Psychology. He earned an MBA from Southern Illinois University with an emphasis in Accounting and recevied his JD degree from Southern Illinois University. Roman is a licensed attorney in Illinois, Missouri and Florida and is in high demand for his expertise in financial, legal and tax matters. His areas of expertise include mergers and acquisitions, contracts, real estate law, tax and estate planning. CLOSING OF THE BOOKS Corporations are part of the American way of life, but unbeknownst to many is the existence of the S corporation. The S corporation is an entity typically used by small businesses for its pass-through form of taxation different from C corporations (Walmart, Apple, Microsoft, etc.) that many are familiar with. However, C and S corporations do share some similarities, primarily in the form of ownership and stock control that dictate the company model. Simply put, if you own stock in a corporation you are an owner, and at some point owners may want to sell their stock in the company to “cash out”. Or, owners may be approached by another company looking to acquire it. When one company seeks to acquire another or the company’s stock is being sold, it can create several questions in regard to S corporations: [1] what happens if the shares are sold mid-tax year [2] what happens if the company holds an election to “close the books” [3] how do you break up the income on taxes if a shareholder is bought out? We’ll take a closer look at each of these individually then all together. As we all know, there are 365 days in the calendar year and the likelihood of a shareholder being bought out or the company being bought mid-tax year as opposed to the end of year is high. One might ask how you allocate funds in a mid-year buyout or acquisition. Well, the general rule requires the funds to be split among shareholders pro-rata on a per-share, per day basis. For instance, a 50% owner of an S-corporation bought out March 31st (end of first quarter) would be entitled to 12.5% of the yearly funds. The CONTRIBUTOR ARTICLE funds always follow whether a profit or a loss exists. This method is standard when the company chooses to forego change in its corporate structure at the time it’s acquired. Instead, the company chooses to close the books and make changes at the end of the tax year; however, there may be a better way. Another method to handle an S corporation shareholder buyout is to hold a special election deemed a “closing of the books”. Closing of the books is a method that allows a company to halt the profits or losses on a specific date to provide the subsequent income to new shareholders in accordance with their ownership. Take the previous example, owner of 50% of an S-corporation is bought out March 31st, and the company holds an election to close the books. All new owners vote a unanimous yes to close the books (mandatory that all vote yes), wherein the company’s accounting method ends the first quarter, then continues the second through fourth quarters separately for the new owners. The 50% previous owner would take his share of profit or loss for January 1st through March 31st, then take nothing from the following three quarters. The departed partner would not retain any subsequent taxation after the closing date. However, depending on the company’s margins at the time of the vote, the closing of the books method could create a benefit or detriment to the previous owner and new owners. Closing of the books is an important method for S corporation shareholders to take note of because of the pass through nature of their corporations. Due to the pass through ability of the S corporation, owners may wind up paying substantially different amounts in personal income taxes depending on when they decide to close the books. CONTINUED ON PAGE 140



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