Federal Tax

S Corporation and forgiveness of debt

  • 1.  S Corporation and forgiveness of debt

    Platinum Most Valuable Member
    Posted 09-04-2016 01:57 PM
    Edited by Robert Brown 09-04-2016 01:57 PM

    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?

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    Robert Brown
    ROBERT N. BROWN, CPA
    Jericho NY
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  • 2.  RE: S Corporation and forgiveness of debt

    Bronze Most Valuable Member
    Posted 09-04-2016 06:22 PM

    The S corp lends it to itself?

     

    Call me 6102128978

     

    Ed

     

    Edward P Caine CPA / CFF / CITP / CGMA

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  • 3.  RE: S Corporation and forgiveness of debt

    Platinum Most Valuable Member
    Posted 09-05-2016 08:58 AM

    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:

    1. does the shareholder owe 100% of the s-corp?
    2. has the shareholder forgiven the debt to the company?
      1. if forgiven, would this income be passed through to the shareholders, thus creating double income to the taxpayer?
      2. if NOT forgiven, the S-Corp would have to continue paying the shareholder

    Steve

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    Stephen Mankowski
    EP CAINE & ASSOCIATES, CPA LLC
    Bryn Mawr PA
    215-674-5652



  • 4.  RE: S Corporation and forgiveness of debt

    Platinum Most Valuable Member
    Posted 09-05-2016 11:07 AM

    Steve;

    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.

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    Robert Brown
    ROBERT N. BROWN, CPA
    Jericho NY



  • 5.  RE: S Corporation and forgiveness of debt

    Silver Most Valuable Member
    Posted 09-05-2016 04:12 PM

    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. 

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    Robert Barnett
    CPA, ESQ.
    Capell Barnett Matalon & Schoenfeld LLP
    JERICHO NY



  • 6.  RE: S Corporation and forgiveness of debt

    Platinum Most Valuable Member
    Posted 09-05-2016 10:53 PM

    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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  • 7.  RE: S Corporation and forgiveness of debt

    Platinum Most Valuable Member
    Posted 09-06-2016 09:05 AM
    Edited by Robert Brown 09-06-2016 03:10 PM

    Thank you all for your insight.

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    Robert Brown
    ROBERT N. BROWN, CPA
    Jericho NY