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Gary Bode, CPA is a Master's Degreed, nation wide accountant offering tax and business services. Member of AICPA and NCACPA. Our virtual office provides excellent service to long distance and international clients. Call (910) 399-2705 for a free phone consult.

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I became totally and permanently disabled after a working for 44 years. I returned to college late in life (while working full-time) to fulfill my dream of becoming an RN and at that time found it necessary to secure student loans. Three years after being declared totally and permanently disabled my student loans were discharged. In January 2013 we received a 1099-C form declaring said student loans that were discharged however that amount could be considered as income for 2012. This was a large amount of money and we live on two pensions and social security income.

I started looking on the internet for information regarding 1099-C and felt that this was something that we could not handle alone. I made phone calls locally to a very reputable tax group in a city near us and they said it would cost $500 for an appointment and that they really prefer to do corporate taxes and they referred me to a local person who had worked for them at one time, we called and explained the situation and an appointment was made and then the comment was made that "I will have to do some research on this" and flags immediately went up and we called back and cancelled that appointment. I had been researching the IRSwebsite and every place else I could think of and I was not comfortable doing our own taxes this year. We called another local tax preparer that we had used in the past and made an appointment, however prior to the appointment, while still seeking information regarding our situation,

I came across a website for Gary l. Bode, MSA, CPA, PC in Wilmington, NC. I called Mr. Bodeand explained our situation and asked if he could help. He spoke very knowledgeably regarding the situation and stated that yes; he felt he could help us. As Mr. Bode was in North Carolina and we were in New York I scanned all of our documents including back-up documents for all of our claims and forwarded all to him. Mr. Bode kept in touch with us via email; we have spoken on the telephone several times and have become very comfortable with his knowledge and professionalism. Also, as I am a true "worrier" I have continued looking into information regarding our tax situation and I came upon another web page for Mr. Bode that included testimonials which spoke of his experience with this type of tax situation as it became prevalent during the recession. This reinforced in our minds that we had made the right decision in hiring this person as our tax preparer.

I share all of this as our taxes are now ready to be filed (we do owe tax for 2012 but not the astronomical figure we thought we were facing), and we are confident that they have been prepared with the utmost care by a gentleman who has an excellent working knowledge of the situation we faced and the tax laws that were applicable to said situation.

 

Bill and Carol

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S Corporation CPA discusses S Corporation Debt on Form 1120-S | Form 1099-C, Cancellation of Debt

S Corporation CPA discusses S Corporation Cancelled Debt on IRS Form 1120-S, U.S. Income Tax Return for an S Corporation

I’m seeing more S Corporation IRS Form 1099-C(s), Cancellation of Debt. (910) 399-2705.

As an S Corporation CPA and cancelled debt sub-specialist, I’m seeing more S Corporation Form 1099-C(s), Cancellation of Debt, probably as delayed fallout from the Recession. The tax treatment of S Corporation cancelled debt isn’t covered well in the IRS Form 1120-S instructions, in my opinion. Publication 4681, Canceled Debts, Foreclosures, Repossessions, and abandonment doesn’t deal much with S Corporation cancelled debt either. Even my professional tax preparation software doesn’t handle S Corporation cancelled debt automatically. I still have to essential hand prepare the Form 1120-S, U.S. Income Tax Return for an S Corporation, and do a manual work around to properly file.

I’m a CPA whose firm operates as an S Corporation. This blog site allowed me to specialize  in cancelled debt. So this post topic is a good match. If your S Corporation receives a Form 1099-C consider calling for a free consult. (910) 399-2705. Our virtual office means we can help you and your S Corporation regardless of location.

Is the Form 1099-C issued in the S Corporation’s Name?  

If it is, this post can be useful. Most S Corporations don’t establish their own credit and S Corporation shareholders guarantee liability personally. So the Form 1099-C might be issued in the shareholder’s name. So here’s a link to my most popular personal cancelled debt post.

The most confusing topics in S Corporation Cancellation of Debt Tax Reporting

  • The tax rules for S Corporation cancellation of debt changed in March 2002. We’re looking at 2013 and 2014. Few S Corporation Form 1099-Cs get issued for bankruptcy, rental real estate etc. before that date. But most of the internet chatter still discusses the comparison between the old and new tax reporting rules. I’m sticking to the “new” tax reporting requirement for S Corporations.
  • Most Internet chatter compares the S Corporation tax reporting rules on Form 1120-S, U.S. Income Tax Return for an S Corporation for cancelled debt against a Partnership (Form 1065).

The notorious Sec. 108 as applied to S corporation Cancelled Debt

“Cancelled debt on Form 1099-C, Cancellation of Debt, becomes taxable income to the S Corporation unless it can be excluded through an exception or exclusion on Form 982, Reduction of Tax Attributes.” 
– Gary Bode, S Corporation CPA

S Corporation cancellation of debt “income” gets recognized at the Corporate level after Sec. 108 is realized and passed through Form 1120-S’s Schedule K-1.

Sec. 108(a)(1) allows for exclusion of cancelled debt income from gross income where the debt discharge:

  • S Corporation Title 11 bankruptcy.
  • S Corporation insolvency.
  • Qualified farm indebtedness if the Farm operates as an S Corporation.
  • Is qualified real property business indebtedness; e.g. rental real estate foreclosure, rental estate short sale, rental real estate mortgage loan modification.

Tax Reporting Treatment for Title 11 bankruptcy and Insolvency for S Corporation cancelled debt

Once the Form 1099-C, Cancellation of Debt, gets issued should consult with an S Corporation bankruptcy as part of due diligence. However the favorable tax rules for S Corporation cancelled debt may allow the same result on Form 982, assuming the same financial circumstances. Especially when the S Corporation cancelled debt stems from rental real estate. The combination of insolvency and qualified real property business indebtedness on Form 982 generally do the trick.

The Reduction of Tax Attributes section of Form 982

There are tax positioning strategies to help make S Corporation cancelled debt a free ride with the IRS. But sometimes you can’t control the timing of cancelled debt and the S Corporation essentially delays the tax consequences of cancelled debt until another S Corporation gets sold. The S Corporation must adjust the basis of its other assets meaning an increased gain or decreased loss when they’re sold. The second best thing to paying no tax is paying the tax later.

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1 comment to S Corporation CPA discusses S Corporation Debt on Form 1120-S | Form 1099-C, Cancellation of Debt

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