Corporate liquidation taxation: what every tax professional needs to know

Liquidating a corporation involves distributing its assets and settling its obligations, which can trigger various tax consequences, such as capital gains or losses, tax liabilities and potential deductions. It’s important you have all the information necessary to guide your client in the right direction. 

Below, you’ll find a few of the top questions from a recent webinar on the topic and their accompanying answers. If you choose to attend the on-demand version of this webinar, you’ll have access to the full recording and the entire list of Q&As.   

Q: If my C corporation balance sheet has both loans from stockholders and loans to stockholders, how are those accounts handled in a complete liquidation?
A: If the shareholder assumes the liability, the value of the distribution is reduced by the loan, and for the corporation, the selling price increases from FMV to the amount of the liability, if greater.

Q: How does a shareholder loan affect the shareholder’s basis?
A: A bona fide loan between the S corporation and a shareholder increases their debt basis, which can be used for recognizing losses.

Q: Is it the §1244 provision that allows for a deduction of up to $100,000?
A: Yes, the §1244 stock loss option allows an ordinary loss of up to $100,000 for married taxpayers ($50,000 each) due to the worthlessness of small business corporate stock. This converts what would be a limited ($3,000) annual capital loss to a larger loss.

Q: If you’re liquidating your personal corporation, do you still recommend a business attorney? Are enrolled agents able to do any of the corporate closing? 
A: Yes, use a business/tax attorney to help liquidate the corporation, or aid in a sale. The unauthorized practice of law is prohibited for CPAs because the training for each role is different and should be respected. Attorneys, CPAs and enrolled agents are all subject to Circular 230.