Client (C corporation) of S corporation wants to pay with stock.

[MikeyLV]

What is the name of your state (only U.S. law)? Nevada

The stock is not publicly traded and there's no fair market value (but there is a valuation based on a third-party investment), so the "agreed upon value" would be $20,000. The shares would be issued in the S corp. company's name.

But as an S corp, I wonder how this is handled at the end of the year. Excess cash (for simplicity sake) is distributed at the end of the year via K1. Assets are just held. Since the S corp. can't turn around and sell the stock as there's no market (plus there might be some non-transferability terms), does the S corp. just sit on it as an asset until it's sold and then the proceeds are considered income which would funnel down to owner distribution via K1?

Then there's the tax question. I'm sure the client would want to take the agreed upon value as a deduction, which means the S corp. has to show it as income, but then how is that distributed to the shareholders?

 

[davew128]

Then there's the tax question. I'm sure the client would want to take the agreed upon value as a deduction, which means the S corp. has to show it as income, but then how is that distributed to the shareholders?

The same as any OTHER business income.

 

[LdiJ]

What is the name of your state (only U.S. law)? Nevada

The stock is not publicly traded and there's no fair market value (but there is a valuation based on a third-party investment), so the "agreed upon value" would be $20,000. The shares would be issued in the S corp. company's name.

But as an S corp, I wonder how this is handled at the end of the year. Excess cash (for simplicity sake) is distributed at the end of the year via K1. Assets are just held. Since the S corp. can't turn around and sell the stock as there's no market (plus there might be some non-transferability terms), does the S corp. just sit on it as an asset until it's sold and then the proceeds are considered income which would funnel down to owner distribution via K1?

Then there's the tax question. I'm sure the client would want to take the agreed upon value as a deduction, which means the S corp. has to show it as income, but then how is that distributed to the shareholders?

You are misunderstanding the nature of the Schedule K1...and the nature of the stock transactions. What gets reported on the Schedule K1 (among other things) is the S-corp's profit (not its extra money left over). The Schedule K1 has nothing to do with physically distributing any money, only with the reporting of profits (and other things) for tax purposes.

In obtaining the stock, the stock is being used like cash, its paying off a debt to you, therefore its income in some form or another.

So, what is going to happen is that it is going to be included on the Schedule K1, meaning taxes will have to be paid on the income, but the 20k that goes for the stock will not actually get distributed to the shareholders, as it will remain in the company because it was basically used to purchase an asset.