Tax question: left s-corp in middle of the year w/no distribution, then get K-1

[RootSkier]

I think I may be a hudge fucking idiot, and I am guessing the CPAs are really busy right now, but does this seem right?

I was a shareholder in an S corp and left in the middle of the 2022. I was also receiving a salary from this entity, all of which is shown on a W2.

I am 99.99% sure I had received $0 in distributions when I left in August, which is somewhat normal for the entity (edit: I did not get a 1099-DIV, if that matters). I then received a K-1 that shows "ordinary business income" as $xx,xxx, but I never received any of this. This is now calculated as taxable income. This seems fucked.

Did the entity fuck up or did I by not figuring out what happened with my shares before I left?

[Core Shot]

Imputed income. I’m no CPA.
But yeah. That’s fubar.

[RootSkier]

I get the difference between stock basis and dividends but I don't believe they didn't do a big fucking distribution at the end of the year...

[Not DJSapp]

Root, that is correct. S-corp income is treated as taxable personal income based upon your percentage of ownership in the business. A good S-corp should have made quarterly distributions to cover personal tax liability via quarterly payments. A standard W-4 won't cover the business taxes and you'll get penalties for underpayment. I'd call the CFO and give him a 'what the hell' on tax distributions. It might have been rolled in with your payout on your shares or you might have fallen through the cracks if you were paid out in August, but they didn't realize the income or profit until the end of the year and then you were off the shareholder list.

[RootSkier]

OK, thanks. The fucked deal is it that it's a firm where there is no buy-in (except time) so there's no buy-out, but historically, they have distributed basically all of the profits at the end of the year, or sometimes once in the middle and once at the end. So when I left I didn't get bought out and basically only got fucked, or at least it appear so. Oh well, I guess that's the price I pay for leaving in a hurry when I couldn't deal with their douchebaggery anymore.

I am having a hard time wrapping my head around how I am paying taxes on money that I assume others received as a distribution though...

[Not DJSapp]

I'd call the CFO, or anyone else and find out if they did a year end distribution. Seriously. The whole deal with S-Corps is that the individuals pay the companies taxes as it is employee owned. The company not providing a distribution to you but hitting you with a K-1 I'd solidly bet is illegal. Distributions made by the company are a cost and impact the bottom line profit that gets sent out to the IRS. By giving you a share of the income on a K-1 but no distribution (which impacts company financials), is not equitable.

Best case is they send out revised K-1's that reduce your ownership to 0% for the year, and everyone else that got a distribution their percentage goes up.

[Foggy_Goggles]

I'm pretty sure that because the S Corp is a pass through entity you owe, through your personal tax return, tax on your share of S Corps income. I think this will be shown on its 1120s. That's the rub with the S Corp, you come clean with the IRS every year wherever the income is distributed on not. Basically, you owned your share of that income until you gave sold your shares for nothing....I think.

[Not DJSapp]

Had to go back and look at one, take a look on your K-1 (form 1065) Box 19. It should tell you your share of the distributions, if any.

If you didn't get paid that amount, take it to the CFO. They're the one's preparing the K-1 and if it doesn't match with reality, it's tax fraud.

[RootSkier]

1065 is the partnership form, no? I only have a K-1 (1120-S), a K-3, and a 7203.

The really interesting thing I can't wrap my head around is that another shareholder left the same year I did. K-1 says I had 1000 shares at the beginning of the year and 0 at the end. OK. But it also says the corporation's total number of shares at the beginning of the year was 9000, and 7000 at the end. It then shows my current year allocation percentage as 7.157%, which makes zero sense at all to me. My shares evaporated into thin air with zero benefit to me but they still had taxable value to me? I do not understand this shit at all.

I DID NOT get a 1099-DIV from this entity.

[Not DJSapp]

The percentage makes sense if you were 1000 of 9000 shares for ~8 months of 12.

You still should have received 7.157% of any distribution money sent out.

[Not DJSapp]

Distributions are Line 16D for the 1120-S. The S-corp I was a part of changed some years back, so now we get 1065's.

[RootSkier]

Distributions are Line 16D for the 1120-S.

$500....

[Core Shot]

Lawyer up. A well written angry ESQ letter might get them to do right.
Good luck.
The only thing worse than paying taxes is paying taxes on money you never got.

[RootSkier]

Lawyer up.

I'll give you one guess about what kind of business this is.

[Danno]

I'll give you one guess about what kind of business this is.

Dentist?

[Not DJSapp]

$500....

There's a lot of other info on your K-1 which can impact your overall tax picture in a good way, including some great tax credits (box 13), and credits on business losses. $500 could potentially cover your entire liability, but $500 on five digits of income isn't a good start.

[Core Shot]

I'll give you one guess about what kind of business this is.

Ouch. That’s fucked.

I know you can have s corp income and no distributions.
And yeah. Suing a lawyer sucks.
But there’s also fairness. Sometimes.
They have to report the income. Which fucks your over. But can’t they pay a marginal rate that covers your taxes?

Vibes. That sucks.

PS. Maybe call a managing partner that seems nice and ask him for a cleanup on aisle 7.

[Mustonen]

I’d give them a chance to make right before going all angry whelk on them.

[Foggy_Goggles]

an S Corp must allocate the profits of the business to the shareholders for tax purposes. However, the S Corp can do what it wants with such profits. Therefore, the business can allocate profits to the shareholders, keep it as retained earnings, or do both

You get this part right? Are we talking a lot of money or a little? Historically what has the S Corp done with profits?

[RootSkier]

You get this part right? Are we talking a lot of money or a little? Historically what has the S Corp done with profits?

I was there long enough to see that they always made year-end distributions.

We are talking 5 figures in tax liability. I'll survive either way but these are also people I considered as friends. And that I still sometimes have to work with.

[Foggy_Goggles]

Were you expecting your pro rata share of the distributions? If you were a shareholder for part of the year I think the tax liability is real? Have they actually told you to get fucked yet? How has this been handled prior?

Seems like a weird situation

[RootSkier]

I don't think expectations matter too much in this context.

I'm just asking technical questions about the tax code.

I knowingly walked away from $$ and that's OK,
but someone else got that $$ and I'm just trying to understand why I'm paying tax on it.

[Foggy_Goggles]

I think you understand this. You owned a corporation and that corporation had taxable income. It makes no difference if it was paid to you (dividend), paid to someone else or sits in the corps checking account.

Can I leave money in my S Corp at the end of the year?
At the end of each year, all S corporation profits are allocated to the corporation's shareholders. Even if you and your fellow shareholders choose to leave some or all of the profits in the corporation, taking nothing as distributions or salaries, you will still be required to pay tax on those profits.

You "selling" your shares for zero has nothing to do with it. You could have, sold your shares back for real money, asked for a special dividend, negotiated severance and so in.

If you've got a 5 figure tax liability I'm guessing that is on 6 figures of income.

I'm just some dumb carpenter that has owned a S Corp for 20+ years. It took me a while to figure it all out. It works good for me but you really have to be on top of realizing that cash inflows to the business can be taxable events. If I get a a $50k check that hits my account on 12/31, that is taxable income.

[Core Shot]

I don't think expectations matter too much in this context.

I'm just asking technical questions about the tax code.

I knowingly walked away from $$ and that's OK,
but someone else got that $$ and I'm just trying to understand why I'm paying tax on it.

Are they cash or accrual accounting?

If accrual, it’s quite possible they made money in theory, but until it’s collected it’s just a tax payment that needs to be paid. If never collected, it’s an expense in later years.

Sounds like they were friendly. And you still interact with them. Find the most powerful and nice person in the firm and plead your case.

Or
Jack A Orseoff for more money.

PS. Do you not have a copy of the S corp bylaws or operating agreement? The answer is in there.
PPS. I’m shocked dentists would set up such a foolish way to share profits.

[RootSkier]

I think you understand this. You owned a corporation and that corporation had taxable income. It makes no difference if it was paid to you (dividend), paid to someone else or sits in the corps checking account.

You don't think it makes a difference whether that taxable income was paid to me or paid to someone else? Interesting!