Scheduel C or Schedule D

[Maria]

Hello,

I have a client who I helped to file a final return on her S corporation for 2005. During 2006, even though the business was completely closed, she was obligated to pay rent until the lease expire. She ended up paying around $21,000. Should I deduct it on Schedule C or D, or even E.

Thanks!

[rosieea]

Hello,

I have a client who I helped to file a final return on her S corporation for 2005. During 2006, even though the business was completely closed, she was obligated to pay rent until the lease expire. She ended up paying around $21,000. Should I deduct it on Schedule C or D, or even E.

Thanks!

This is unresearched, but I believe that the assumption of such an obligation would add to basis & therefore be deducted on schedule D as a deemed sale with zero proceeds and 21K basis.

[OldJack]

Hello,

I have a client who I helped to file a final return on her S corporation for 2005. During 2006, even though the business was completely closed, she was obligated to pay rent until the lease expire. She ended up paying around $21,000. Should I deduct it on Schedule C or D, or even E.

Thanks!

It would go on 1040 Sch-E, page 2 as a "business bad debt", the same as if she was paying off a S-corp loan with the bank that she had given a personal guarantee. It is not a capital transaction for Sch-D. See TTB page 8-5 :

[rosieea]

It would go on 1040 Sch-E, page 2 as a "business bad debt", the same as if she was paying off a S-corp loan with the bank that she had given a personal guarantee. It is not a capital transaction for Sch-D. See TTB page 8-5 :

However, see TTB page 18-18. "Post-termination expenses. Expenses of a corporation incurred by a shareholder after a complete liquidation are treated as capital expenses (additions to stock basis). Such expenses are reported by an individual on Schedule D, Form 1040."

In the situation described, I vote for Sch D.

[ChEAr$]

However, see TTB page 18-18. "Post-termination expenses. Expenses of a corporation incurred by a shareholder after a complete liquidation are treated as capital expenses (additions to stock basis). Such expenses are reported by an individual on Schedule D, Form 1040."

In the situation described, I vote for Sch D.

Amen, Rosie.

[OldJack]

Well... true for post-termination expenses. I don't believe her personal guarantee liability on the lease to pay the expenses are what I would call post-termination expenses. Also, note that post-termination expenses are limited to what is paid within 12 months from the date of a plan of liquidation. Were all these payments within 12 months of a plan? If you really want to limit the loss deduction to $3,000 per year go ahead and put it on Sch-D.

[rosieea]

Well... true for post-termination expenses. I don't believe her personal guarantee liability on the lease to pay the expenses are what I would call post-termination expenses. Also, note that post-termination expenses are limited to what is paid within 12 months from the date of a plan of liquidation. Were all these payments within 12 months of a plan? If you really want to limit the loss deduction to $3,000 per year go ahead and put it on Sch-D.

We may need more info re: personal guarantees and all that. But I'd say the 12 month limitation clearly applies in the case of a business bad debt. At least according to the item you posted from TTB - no deduction after 12 months of the debt becoming worthless. Anyway, we'll agree to disagree. I'm still thinking Sch D, 3K limit or no.

[Maria]

Schedule D or E

Thanks for everybody's input.

I was to put it on E, my assumption was if she had not closed the S corp, the rent expense would have gone to E, input in the K-1. However, I think we have put it into line 21, other income (expenses). Not sure if correct or not.

Thanks

[rosieea]

Thanks for everybody's input.

I was to put it on E, my assumption was if she had not closed the S corp, the rent expense would have gone to E, input in the K-1. However, I think we have put it into line 21, other income (expenses). Not sure if correct or not.

Thanks

Well, I don't think line 21 is correct.

[cpadan]

What the courts have to say about sole shareholder debt

In this case, debt was originally shown on D, taxpayer wanted to move to C, IRS and the courts chose A.

Graves v Com, affirmed by 9th Circuit, MEMORANDA N0 04-7587-02 that once an individual incorporates, the trade or business belongs to the corporate entity, not the individual; individual is in the business of being an employee.

The 9th circuit affirmed that the bad debt was an itemized deduction subject to the 2% floor and said this would apply even if the dominent motive was to meet corporate obligations, maintain the business, or for protection of investment.

I noticed that taxpayer prepared own return and self represented in tax court. Most likely used Turbo Tax and the Turbo Tax Court Defender II.

Dan

[OldJack]

But I'd say the 12 month limitation clearly applies in the case of a business bad debt.

I don't know how your client would consider the debt worthless when it is your client paying the debt so there is no 12 month worthless limit in this case. It would be the landlord that would maybe consider the debt worthless and it would also be hard for him if he is receiving payments.

[rosieea]

I don't know how your client would consider the debt worthless when it is your client paying the debt so there is no 12 month worthless limit in this case. It would be the landlord that would maybe consider the debt worthless and it would also be hard for him if he is receiving payments.

I still don't think we're dealing with a bad debt situation, but if it is, the debt was worthless the moment the obligation passed to the shareholder. The corporation no longer existed, and there was never any chance of repayment. Anyway, Jack, truce. I've said my piece & I'm done.

[OldJack]

I still don't think we're dealing with a bad debt situation, but if it is, the debt was worthless the moment the obligation passed to the shareholder. The corporation no longer existed, and there was never any chance of repayment. Anyway, Jack, truce. I've said my piece & I'm done.

Not to argue with you Rosie, just to clarify my thinking. Odds are the corporation was never on the lease as the shareholder rented the property as she setup the business. The landlord would not want a new corp to sign the lease when he could get a live person. That is why I say it was a business debt for the shareholder, not the corporation. Or, she guaranteed the lease for the corporation expecting benefits as an employee which again makes it a business debt gone bad in her hands. (edit: much the same as if she had loaned money to the corp)

[rosieea]

Not to argue with you Rosie, just to clarify my thinking. Odds are the corporation was never on the lease as the shareholder rented the property as she setup the business. The landlord would not want a new corp to sign the lease when he could get a live person. That is why I say it was a business debt for the shareholder, not the corporation. Or, she guaranteed the lease for the corporation expecting benefits as an employee which again makes it a business debt gone bad in her hands. (edit: much the same as if she had loaned money to the corp)

If your assumptions are correct, then there is a clear case for treatment as a bad debt. Anyway, it's moot. Maria has chosen to put the expense on line 21, thereby telling us both where to go. She's wrong, of course, but it's been fun.

[OldJack]

I agree that line 21 is completely incorrect. But then a lot of tax returns go with incorrect stuff on them.