Search Knowledge Base by Keyword
Taxpayers Guide to LLCs and S Corps
Expat and Expatriate KB
Rental Property KB
Other Tax Information KB
Small Business KB
- Articles coming soon
By Jason Watson, CPA
Posted Sunday, July 11, 2021
As the only shareholder of an S Corp, you might think that everything the business owns you also personally own. Not true. The relationship you have with your S Corp is not a marriage where mine is mine and yours is mine too.
If you want to move assets out of an S corporation or convert them to personal use, you will trigger a taxable event. A potentially big one. When assets are distributed to the S Corp shareholders, they are distributed at fair market value. Cash is easy. An automobile is generally not a big deal. But real estate can kick your butt.
We recently had a consult with an S Corp owner whose business owned a hotel building. On the advice of an inexperienced CPA he revoked his S corporation election. This triggered a distribution of business assets at fair market value. The basis in the hotel building was $400,000 and the fair market value was $2,000,000. This sparked a $320,000 capital gain tax event reported on his K-1. Capital gains is a success tax, right? But when you don’t actually get the cash from the transaction, this tax could be impossible to pay. Keep appreciating assets out of an S corporation people (or at least have eyes wide open on the risk)!
Sole proprietors and garden-variety LLCs enjoy a bit more flexibility under certain circumstances.
Assets within your S Corp can also be problematic upon death. If you own an asset at the time of death, the asset is re-valued and your heirs get a step-up in basis (cost). So when they sell the asset their gain is lower. For example, you buy a painting for $5,000 and when you die, the painting is valued at $20,000. If your heirs sell the painting for $22,000, they will only realize a $2,000 taxable gain.
If the asset is sitting in the S Corp upon your death, the S corporation’s stock value might get a step-up in basis through an appraisal. However, it might prove harder to demonstrate than the increased value of one particular asset. Look at it another way. S Corps don’t die, and therefore assets within the business don’t get a step-up in basis upon a shareholder’s death.
We’ll acquiesce. This trapped asset problem is super rare yet so many owners love to have personal stuff owned by the S Corp.
Taxpayer's Comprehensive Guide to LLCs and S Corps 2021-2022 Edition
This KB article is an excerpt from our 430-page book (some picture pages, but no scatch and sniff) which is available in paperback from Amazon, as an eBook for Kindle and as a PDF from ClickBank. We used to publish with iTunes and Nook, but keeping up with two different formats was brutal. You can cruise through these KB articles online, click on the fancy buttons below or visit our webpage which provides more information at-