Tax consequences of liquidating 401k


tax consequences of liquidating 401k-29

The primary difference between C corporations and S corporations is that C corporations are taxed twice on earned income: : once at the corporate level when the income is earned, and again at the shareholder level when the income is distributed.

The rules governing distributions from C corporations differ from the rules that apply to distributions from S corporations.

Instead, the distribution is governed by the general nonrecognition rule of Code § 311(a), which prevent the corporation from recognizing loss on a transfer of depreciated property. § 302(b)(1), this test is usually used only when the safe harbors of I.

Liquidation is a taxable event for both the shareholder and the corporation. Like the “Redemptions Not Equivalent to Dividends” test of I.

To the extent that a distribution is made from the corporation’s earnings and profits, it is taxed to the shareholder as a dividend.[1] The portion of the distribution that is not considered a dividend is applied first to reduce the shareholder’s basis in the corporation’s stock.[2] Any remaining portion is treated as gain from the sale or exchange of property (capital gain).[3] Important Note: If a shareholder assumes a liability or takes property subject to a liability, the amount of the distribution is reduced by the amount of the liability.[4] Special rules also apply at the corporate level.[5] Special rules apply to distributions to a shareholder in exchange for the shareholder’s stock (redemptions).

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