SCorp form 982

[BHoffman]

Additional info:

The credit cards were in the business name and he personally guaranteed them. He said the collection letters are addressed to both him and to the Scorp.

The corporation was administratively dissolved by the AZ Corp. Commission in 2010 because the annual report wasn't filed.

It's his understanding from a preliminary conversation with a bankruptcy attorney that the business credit card debt will be included if / when he files for personal bankruptcy because of the personal guarantee. I'm not sure about that, but I'm not a lawyer. He's going to speak again with her early next week. And I'm leaving town 08/25 - 08/30.

So, I would like to keep the debt on the books and wait until tax year 2010 to mark the return as "final". It seems like there are too many unresolved things going on. Does that sound reasonable? I don't want to do anything that might interfere with the bankruptcy. I'm going to send him an email and tell him to ask his attorney if that's what she wants me to do.

I sure do appreciate your comments and suggestions. This is just twisting me up. The client seems ashamed and reluctant to talk about it, so that isn't helping.

[JON]

If you do not pay

the debt it is income to the corporation and passed out to the shareholders. They got the deductions and now they get the income. Insolvent does not give anything tax free on the corporate side. You book everything and clear out the balance sheet. My guess is you have income going out to the shareholders.

As said before all debts, including credit cards, are shown as business deductions and if the balance due on anything is not going to get paid it is income to the corporation as you close out the balance sheet. If you get the deductions to shareholders in a previous year you do not have an exemption for picking up the forgiveness of debt in the curent year.

[Maribeth]

Additional info:

The credit cards were in the business name and he personally guaranteed them. He said the collection letters are addressed to both him and to the Scorp.

The corporation was administratively dissolved by the AZ Corp. Commission in 2010 because the annual report wasn't filed.

It's his understanding from a preliminary conversation with a bankruptcy attorney that the business credit card debt will be included if / when he files for personal bankruptcy because of the personal guarantee. I'm not sure about that, but I'm not a lawyer. He's going to speak again with her early next week. And I'm leaving town 08/25 - 08/30.

So, I would like to keep the debt on the books and wait until tax year 2010 to mark the return as "final". It seems like there are too many unresolved things going on. Does that sound reasonable? I don't want to do anything that might interfere with the bankruptcy. I'm going to send him an email and tell him to ask his attorney if that's what she wants me to do.

I sure do appreciate your comments and suggestions. This is just twisting me up. The client seems ashamed and reluctant to talk about it, so that isn't helping.

In a situation such as this, I too would advise the client to leave the corporation open for another year in order to resolve the outstanding issues. I believe that that is a prudent move at this point. You may also need to leave the corporation open depending on the type of bankruptcy that is filed.

Good luck, and good luck with your client.

Maribeth

[BHoffman]

Maribeth - thanks as always for your patient advice

Jon - thank you very much for spelling it out so plainly. Believe me, I have no pride when I'm banging my head against the brick wall. I think my confusion is mostly about excluding the COD income, when this is not really COD income at all.

[BHoffman]

I'd like to kick this around some more

Regarding the credit to expenses charged on the credit card in order to debit the credit card liability, I'm starting to wonder about this.

The expense was actually incurred and the vendor was actually paid. The vendor actually billed the client and not the credit card company.

The vendor recognized taxable income. Shouldn't the client have reciprocating deductible expense? Didn't the credit card company simply "loan" the funds to the client?

What if the expenses had been paid with a Business Line of Credit? What if they were paid by a Loan from Shareholder?

I trust what I've heard here, but am wondering why my thinking is incorrect?

[Maribeth]

Regarding the credit to expenses charged on the credit card in order to debit the credit card liability, I'm starting to wonder about this.

The expense was actually incurred and the vendor was actually paid. The vendor actually billed the client and not the credit card company.

The vendor recognized taxable income. Shouldn't the client have reciprocating deductible expense? Didn't the credit card company simply "loan" the funds to the client?

What if the expenses had been paid with a Business Line of Credit? What if they were paid by a Loan from Shareholder?

I trust what I've heard here, but am wondering why my thinking is incorrect?

Speaking only from the accounting side: you will have to credit something when the credit card debt is adjusted off the books. That credit will hit the income statement. Perhaps my comment about reversing the expenses is a bit off. But you will have a revenue item of some sort, perhaps labled "cancellation of debt".

If the expenses had been paid by a LOC, the answer is still the same.

If the expenses were paid by a loan from the shareholder, there would be no income statement adjust. That adjustment would happen upon the recognition of gain/loss on the liquidation of the corporation and the determination of basis to the shareholder.

Maribeth

[BHoffman]

Hi Maribeth,

If the credit is "Cancellation of Debt" on the books, then would that income be excluded on the tax return due to the insolvency of the SCorp? An M-1 adjustment?

What happens if the credit card company issues a 1099-C to the shareholder's name and SSN instead of the Corporation and its EIN?

Thank you for your comments.

[JON]

I do not

think there is any insolvency exemption for cancellation of a debt at all for corporations. That would be neat for S Corps to get a loss out in a previous year and then exempt the income in the following year, because they are insolvent. Business means you utilized the debt for some business purpose. At the individual level most spend more on nondeductible items then tax return items. That is why the insolvency issue works for them.

[BHoffman]

SCorp COD can be excluded, NOL and Basis issues

Ed Zollars is a tax guru extraordinare:

http://www.edzollars.com/2008-08-04_108andS.pdf

At the time of his writing, Reg. 1.108-7 was only proposed but it did pass:

See 1.108-7(d)

Thanks to everyone for your comments and interest.

[JON]

Limitations

on "basis" for net operating loss deductions. Be careful.

[BHoffman]

I'm always careful

This particular return isn't complicated at all. Small company, one shareholder, no employees. Won't have any current year NOL in 2010. No carryovers. No deferred losses. (whew).

Thanks for your help and advice.