IRS Form 1120S CPA tax accountant discusses rental property cancelled debt for S Corporations | Form 1120S instructions for line 11 of Schedule B | Form 8825

IRS Form 1120S CPA tax accountants see rental property cancelled debt too. Rental real estate foreclosures and short sales aren’t just for Schedule E landlords. But strangely, the IRS Form 1120S instructions don’t even include mention of Line 11 of Form 1120S Schedule B, where your S Corporation enters non shareholder cancelled debt. As a Form 1120S CPA tax preparer, I find that odd because S Corporation cancelled debt has different tax reporting rules than Individual cancelled debt (Form 1040 / Schedule E filers). S Corporation rules differ from Partnership cancelled debt tax reporting rules too. So I’ll present an overview of S Corporation rental real estate cancelled debt including Form 4797, Sales of Business Property, and Form 8825, Rental Real Estate Income and Expenses of a Partnership or an S Corporation.

S Corporation tax preparation tasks with rental real estate cancelled debt for Form 1120S, U.S. Income Tax Return for an S Corporation

• Find IRS Form 1099-C, Cancellation of Debt. Too obvious? Maybe not. Form 1120S cancelled debt reporting rules require disclosure of non shareholder cancelled debt in the year of debt cancellation.
  • Because of the multiple triggering events banks can use to issue Form 1099-C, they often arrive late, sometimes in a subsequent tax year.
    • Sometimes you can use other original documentation for the debt cancellation date, like a short sale agreement pre-dating the HUD.
  • If your S Corporation had a rental property foreclosure in 2014, but did not receive a Form 1099-C, I recommend pulling the IRS records in 2015, before your Form 1120S CPA completes the tax preparation.
  • Pulling IRS records probably requires an S Corporation tax extension. File IRS Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns, by March 15th, 2015 because the IRS 2014 information only becomes available in April.

“Sometimes the S Corporation’s rental property cancelled debt, Form 1099-C, gets issued to the S Corporation Shareholder, not the S Corporation. I don’t cover this situation in this post.”
- Gary Bode, Form 1120S CPA

• Calculate the non shareholder S Corporation cancelled debt on Line 11 of Schedule B (page two of Form 1120S).
  • Again the Form 1120S instructions don’t cover the calculation.
  • Note that with S Corporation rental property short sales, the cancelled debt on Line 11 can exceed the amount in Box 2 of Form 1099-C, Cancellation of Debt. Ouch.
  • I usually include the calculation for cancelled debt with Form 1120S. Why? I think there’s enough miscalculation of S Corporation cancelled debt that it helps the IRS Revenue Officer put your Form 1120S in the “good” pile.
• Prepare Form 8825, Rental Real Estate Income and Expenses of a Partnership or an S Corporation.
  • If your S Corporation just had a rental property mortgage modification, preparation of Form 8825 stays the same for 2014 with no special issues.
  • If your S Corporation had a rental property foreclosure or short sale there are a few tax preparation wrinkles for the Final Form 8825.
    • One example is depreciation. The S Corporation has rental property depreciation expense up to the date of title transfer.
• Prepare Form 4797, Sales of Business Property, if title of the rental property changed hands.
  • If you thought it strange that Form 1120S instructions didn’t cover S Corporation cancelled debt, you’ll be on the opposite end of the spectrum with Form 4797 instructions.
  • Even though your S Corporation’s Form 4797 tax reporting is straight forward, the Form 4797 instructions cover a broad array of circumstances that make it hard to pick out salient points.
• Report the Shareholder’s cancelled debt tax figures, from the issues above, on Form 1120S Schedule K-1, Shareholder’s Share of Income, Deductions, Credits, etc.

“Most Form 1120S CPAs don’t use the Form 1120-S instructions. Why? We have specialized tax databases that interpret and summarize S Corporation rental property cancelled for us. I’m also a Tax Section member of the AICPA giving me access to pertinent articles approved by the AICPA.”
- Gary Bode, Form 1120S CPA

S Corporation rental real estate cancelled debt stays in the S Corporation

Specifically an S Corporation’s rental real estate Form 1099-C, Cancellation of Debt, stays in the S Corporation and triggers no income to the Shareholders on Schedule K-1. None the less your Form 1120S CPA will prepare Form 982, Reduction of Tax Attributes, and use the IRS insolvency and/or discharge of qualified real property business indebtedness exclusions.

Do you need a Form 1120S CPA to handle the tax reporting for you S Corporation’s cancelled debt?

Well I’m a CPA that operates as an S Corporation. If I didn’t specialize in cancelled debt, I’d hire a Form 1120S CPA who does if I had rental real estate cancelled debt. This year, like most years, I had CPA and Attorney cancelled debt Clients. If you don’t have a local Form 1120S CPA knowledgeable with S Corporation cancelled debt, consider calling me for a free consult at (910) 399-2705.

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