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Final S-Corp Tax Return / Shareholder Personal Debt Question

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    #1

    Final S-Corp Tax Return / Shareholder Personal Debt Question

    Just want to make sure I'm not missing something here. I have an S-Corp client whose business ceased operations in 2017 and the entity dissolved. The S-Corp had one (100%) shareholder who had a $475K personal loan to the S-Corp. I've completed the "Final" 1120S with balance sheet zeroed out. I'm not aware of anything special that I need to do with regard to the $475K loan to the business and the related K-1 being distributed to him. On the flip side, the taxpayer would report the $475K bad debt as a short-term capital loss on his personal tax return, on Form 8949. Am I thinking correctly on this matter or did I miss something? Much thanks in advance.

    Brian
    "The hardest thing in the world to understand is the income tax" - Albert Einstein
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    #2
    Originally posted by bbrownatl View Post
    Just want to make sure I'm not missing something here. I have an S-Corp client whose business ceased operations in 2017 and the entity dissolved. The S-Corp had one (100%) shareholder who had a $475K personal loan to the S-Corp. I've completed the "Final" 1120S with balance sheet zeroed out. I'm not aware of anything special that I need to do with regard to the $475K loan to the business and the related K-1 being distributed to him. On the flip side, the taxpayer would report the $475K bad debt as a short-term capital loss on his personal tax return, on Form 8949. Am I thinking correctly on this matter or did I miss something? Much thanks in advance.

    Brian
    I"m thinking the S would have cancellation of debt income if SH want's to claim it as bad debt. Curious as to what account you credited to zero out the due to shareholder liability?
    Last edited by kathyc2; 02-27-2018, 11:53 AM.

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      #3
      Did the S-corp have losses in prior years which the shareholder claimed? Did this loan provide basis for those losses?
      "Taxation is the price we pay for failing to build a civilized society." ~ Mark Skousen

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        #4
        It has been a long time since I've had to deal with a situation like this... will be coming up next year though for a client.

        Here are a couple of good articles regarding the situation:
        Discharge of Indebtedness: Conversion vs. Contribution of Indebtedness
        https://www.thetaxadviser.com/issues/2009/apr/dischargeofindebtednessconversionvscontributionofindebtedness.html
        In an effort to de-leverage, more and more creditors, particularly those also holding an equity position, are willing to accept repayment for less than the face amount of the debt. Apart from settling the debt in cash for less than its face value, there are other methods debtors and creditors may use to modify, reduce, or even eliminate debt.


        Tax Considerations for Cancellation-of-Debt Income
        https://www.thetaxadviser.com/issues/2015/may/tax-clinic-06.html
        This item provides an overview of the U.S. income tax implications of cancellation-of-debt income that results from bankruptcy or insolvency, with a focus on the differences in the tax treatment for C corporations, S corporations, and partnerships.


        If I understand correctly the loans from shareholder would be re-categorized as capital contributions. Problem that comes up there is if they used prior year losses to eat up their loan basis.

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          #5
          If everything Zeroed out and nothing distributed (assets) to the stockholder(at FMV) I would think he used up his stock and loan basis in taking loses. I am assuming he was the only stockholder for the life of the corporation. Based on your description it was a terrible investment and operation. He had to invest and loan BIG bucks with 0 return. Write-off should have had in operations as loses were incurred. Unless, we are missing some information.

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            #6
            No discharge

            Jon, agreed. Nothing was distributed other than a few assets. He used up stock and loan basis via the loss amounts. So no gain on debt forgiveness for the S-Corp and no bad debt expense for the shareholders personal return. That is my understanding. Thanks all for the input. If anything further to consider, please let me know.
            "The hardest thing in the world to understand is the income tax" - Albert Einstein

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