"Client stopped operating the S-Corp in 2023"

Was 2023 return marked final?

Shareholder distributed the installment note to himself in conjunction with the liquidation of the S Corp?

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@sjrcpa 

The 2023 SCorp was not marked final but was wondering if this could be amended.

Yes, and the payments he's received are made payable to him, not the SCorp.

To make it even messier, buyer issued 2024 1099 NEC in client's name for 2024 payment. They are correcting this to $0 as we speak.

I'd report the installment sale payment on the 1040.

Is the Gross Profit Percent 100%?

2023 1120S could be amended to say Final. Don't know if I would.

Assets sold to the buyer = purchase price. The assets were mainly goodwill.

His SCorp basis on 12/31/23 was $345,500. 

"since client receives a % each year based on revenue earned, not a % of the sales price."

You gave us a Sale Price and a Payment amount determination Method. If the payments are computed against the sale price, you have an installment sale. If it's just "whatever it come out to" for only 5 years and done, then it's just payments.

So, which is it?

Payments are a % of revenue earned by the buyer each year. The sales price was "for tax and accounting purposes, a value must be assigned to the purchase".

It wasn't so long ago that selling a law practice was unethical.  So of course, lawyers figured out a way to work around calling it a sale.  Eventually they just amended the ethics rules.  This deal probably conforms to those, but does it violate tax rules?  If the sale was by the S Corp (was it really a corporation, anyway, or maybe an LLC?), the payments should be made to that entity and returns should continue to be filed.  The assets sold may have zero basis, but the S Corp has (you tell us) $345K basis. What are you doing with that?  

The 2024 Form 6252 has a question (at the top, #4) added about whether the selling price can be determined.  Not asked, in 2023.  But there are some regulations going back to 1981, about how to handle these situations.  See the instructions to the 6252.  Google AI is not always reliable but it's a good start:

Case 2: Maximum selling price is not determinable, but the payment period is fixed
If there is no maximum price but the number of years for payment is fixed, the seller recovers their adjusted basis in equal parts over the fixed period.
The seller reports gain in any year that the payments exceed the portion of the basis allocated to that year.If a payment is less than the allocated basis, the unrecovered basis is carried forward to the next year.
If the fixed period ends before the basis is fully recovered, the seller can deduct the remaining basis as a loss in the final year.

The purchase agreement list's the seller's name as sole shareholder + his SCorp (Professional Corporation). 

My initial thought was try to get the 2024 1120S return done before 10/15 and file it late to allow the K-1 to flow to 1040. Not sure if this is doable on my end + client would incur $220/month penalty. Doing this preserves the $345k basis correct? Or can the basis be carried over to the 1040 without filing a 1120S?

Wondering if the 7203 filed with the 2023 1040 can be used to support this basis.

If a 2024 1120-S is required, follow the law.  If it is not required, then don't file one.  Seems to me that it is still in business, collecting payments on the sale.  What happens if the buyer defaults?  Who sues him?  The S Corp?  What if its franchise has been revoked for failure to file returns?  And we still don't  know if this is an LLC or a corporation.  

Thanks for all for the feedback! 

Just to update, the tax preparer of the 2023 1120-S finally got back to me and confirmed, among other things, that he filed an extension for the 2024 1120-S so proceeded with filing the 1120-S. The reporting directly on 1040 was a viable option had I not gotten copies of the 2023 1120-S return.

SO, I've completed the 1120-S for 2024 and will move forward preparing for 2025-2027 as well. The pass thru will also allow for the proceeds to be exempt from NIIT given his material participation.

FYI - not an LLC; entity is a PC in Virginia setup as an SCorp + turns out the basis was overstated due to 2024 distributions taken.

Thanks again!