Bankruptcy Credit Cards

[geekgirldany]

Client, I prepare individual and S-Corporation. He had credit cards in the S-Corporation, under his personal name. I did not know this and as such the balance sheet for S-Corporation reported the correct balances owed each year. The credit cards were used strictly for business. He said he stopped using them completely but I do not know that for sure. He might have used for personal after stopped using in business. I have not seen the 1099-Cs yet.

Last year, I brought to his attention the balances had not changed from one year to the next. He said that he, personally, claimed bankruptcy and the credit cards were part of this. I did a little research and told him it would not be included as taxable income because of the bankruptcy but there may be taxable income on some because of them being used in the business.

Total credit card debt showing on the S-Corp books is about $25,000.

I believe that this should be included as income on the S-Corporation because it was used in prior years to bring income down. It will never be paid off and it is really like a loan from shareholder (since finding out that they were in his name) that is now forgiven by the shareholder. Is that correct?

[Golden Rocket]

Not Correct

Sorry Geekgirl, if the credit card was a personal debt of the owner, it cannot be listed as a debt of the S-corp.

Thus at such time as there is 1099-C from the issuer, it will become personal income and not flow through the corporation.
The $25,000 on the books due to the credit card should be due to the shareholder. The debits charged by this $25,000 are still
otherwise intact.

The good news is I don't see any adjustments in reportable corporate income or loss due the change recommended above.
The bad news is there may be huge problems in the shareholder being able to claim losses due to lack of basis. If losses persist
throughout history, this could be like trying to unravel a snakepit.

[geekgirldany]

Well, the credit cards were discharged in bankruptcy so they will not be shown on the personal tax return. Well I will have to fill out the appropriate form to show this.

So you are saying, since the credit cards were in the shareholders name, this is like a "loan from shareholder". So these credit cards that I unknowingly thought were in S-Corp name would be moved to Loan From Shareholder?

This would actually increase his Debt Basis. He has already loaned the company around $10,000... I will have to think about this a little more. He is repaying himself for that loan. I am unsure about adding more onto it. I know he will probably never pay it back.

I know if the past with Schedule C clients that had the credit cards in their name and there was a 1099-C... I divided out the cancellation over what is personal and what was business. Then applied the business part to be included in income on Schedule C.

I would assume the same for S-Corporation but it would be a loan from shareholder that the shareholder has forgiven and would be included in as income... but then I guess the shareholder would have to do a 1099-C to the S-Corp.

ugg

[JohnH]

Dany, I do't think that last part will fly. Individuals cannot issue 1099-C, only lenders and a few other special entities. but there are questions on the corp tax return related to debt forgiveness.

[geekgirldany]

Thanks John... I thought I had never heard of it. But never know.

I will research some more to see if I can find anything else.

[JohnH]

forget my comment regarding the question about debt on the 1120-s.
that only applies to non-shareholder debt.

[Snaggletooth]

Corp is its own Person

I would assume the same for S-Corporation but it would be a loan from shareholder that the shareholder has forgiven and would be included in as income... but then I guess the shareholder would have to do a 1099-C to the S-Corp. ugg

Not sure I can share a lot that would be helpful, but approach the S-Corp as it is a distinct separate person from the shareholder. And it really is, as the corporation is a "person" created by the state. This guy's credit card being in his name means that HE is the responsible party for paying it and not the corporation. For that reason it shouldn't be on the books of the corporation. However, if the guy purchased stuff for the corporation and gave it to the corp for their use, the amount of this can be regarded as a loan from the shareholder. Since the corporation doesn't owe the credit card company, it doesn't matter one iota what how the owner paid for it. It is divorced from the credit card liability, and would owe the shareholder just as if he had paid cash for it.

By contrast, there is NO difference between a proprietor (Sch C) and his company. So any entity reported on a Sch C will be treated the same as the owner. For example, the company could regard the $25,000 as a legitimate debt of the company, and that would be no difference between the company debt and the owner's debt. It would be one and the same.

You point out the addition to "loan basis" and that is valid, except it does not create an additional basis to recognize losses. It creates additional basis to recognize distributions to shareholders, not losses.

Forget a 1099-C until it occurs. It will not transpire between the corp and shareholder, it will be sent from the credit card bank to the individual.

[AZUKHiker]

Loan basis is for losses

You point out the addition to "loan basis" and that is valid, except it does not create an additional basis to recognize losses. It creates additional basis to recognize distributions to shareholders, not losses.

That is not correct.

It is the other way round. Loan basis is available for losses and not for distributions in excess of stock basis. See page 24-5 of TTB.

[Snaggletooth]

Did it change?

????? This is interesting - Read your TTB 24-5 also TTB chapter 19.

Is this new?

[geekgirldany]

Yes, only losses can be taken against loan basis. TTB 19-8 on the web version. Re the example given " Since distributions are taken into account before losses and
deductions, and loan basis may not be applied to distributions."

I am still trying to figure this out.

[AZUKHiker]

Been around for a while

As far as I can tell s1368 has been around for quite awhile. :-)