An S corporation shareholder takes out a loan and lends it to the S corporation. The corporation is paying the debt and several years later, the bank forgives the debt.
What is the impact to the corporation?
------------------------------Robert BrownROBERT N. BROWN, CPAJericho NY------------------------------
The S corp lends it to itself?
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I believe that the Shareholder has a taxable event, but not the corporation. Officially, the corporation owes the money to the shareholder NOT the bank. Therefore, the forgiveness of debt would result in a 1099C going to the shareholder as taxable income.
Now for the questions:
Interestingly enough, there were two 1099-C's sent to the shareholder (husband and wife). One was for a line to the Corp, guaranteed by them, and one to them, deposited in the corporation and had been paid by the corporation.
The one to the corporation is taxable, however, I keeping going back and forth on the second.
The individuals are insolvent.
You need to confirm that the initial loan was made from the bank to the shareholder. As the borrower, any debt reduction is the shareholder's tax issue and Section 108 exemptions need to be explored. The corp. may have guaranteed the loan - and the bank may even send a 1099 to the corp.- but the rules are set and logical - no debt forgiveness to the S corp. The S corp still owes the shareholder. These loans must be carefully documented.
ps.This is the only way for the shareholder to get basis ( for the loan ) to absorb S losses - so someone either got lucky or kudos for good tax advice.
So to clarify as I follow:
Am I right that if the shareholder does not meet any of the exclusions of §108 (a)1, it is income to the shareholder?
And if he did meet any of those exclusions, he would be required to reduce his basis in his stock
Further , He has no choice if he is able to exclude, he must reduce basis. If yes, then he would exclude OI, and later perhaps recognize Capital gain on the disposition of his stock in a subsequent sale.
Penny for your thoughts gentlemen
Abby Alhante, CPA
Kurcias & Alhante, LLC CPAs
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Thank you all for your insight.
------------------------------Robert BrownROBERT N. BROWN, CPAJericho NY
The opinions expressed are the views of the author alone and should not be attributed to any other individual or entity and shall not constitute an accounting opinion.