S Corporation CPA tax accountant discusses use of Form 982 with Form 1120S | Schedule B line 11 of Form 1120S page two | Form 1120S cancelled debt

As September 15th approaches, I’ve received several calls from S Corporation officers and CPAs asking about using Form 982, Reduction of Tax Attributes, with Form 1120S, U.S Income Tax Return for an S Corporation, to exclude Form 1120S cancelled debt from taxable income. That’s in addition to our existing Form 1120S / Form 982 Clients. So I’m guessing line 11 of Schedule B, Other Information, (page two of Form 1120S) causes confusion. The Form 1120S instructions don’t even include Schedule B line 11 in the line by line instructions. Ouch.

Form 1120S cancelled debt stays on the Corporate level

S Corporation cancelled debt doesn’t flow into Schedule K-1, Shareholder’s Share of Income, Deductions, Credits, Etc. Since S Corporation tax reporting rules use the “flow through” concept, with the aggregate tax items from 1120S funneling into your personal Form 1040 via the Form 1120S Schedule K-1. No tax gets generated from cancelled debt on the S Corporation’s tax return. It seems odd that S Corporation cancelled debt doesn’t follow the main tax concept of Form 1120S.

S Corporation cancelled debt on line 11 of Schedule B, Other Information

At first line 11 of Schedule B appears innocent. The Form 1120S instructions don’t directly address it and the tax software I’ve seen doesn’t automatically tally things up like it does for Form 1040. Generally you enter the Box 2 amount of Form 1099-C, Cancellation of Debt, on line 11 of Form 1120S Schedule B. However issuance of Form 1099-C(s) to S Corporations seems even more erratic than Form 1099-C issuance to individual taxpayers. So you need to submit the calculation for the cancelled debt for line 11 if you don’t receive Form 1099-C. You can’t just wait until it gets issued. S Corporation cancelled debt occurs when the debt cancellation occurs.

Why isn’t Form 982, Reduction of Tax Attributes, built into Form 1120S tax software?

I don’t know but it’s a pain to merge an outside form for e-filing.

S Corporation cancelled debt and insolvency (on Form 982)

I’m thinking most S Corporation CPA tax accountants don’t see much S Corporation cancelled debt. Even though I deal with cancelled debt routinely, I’m only conversant with S Corporation bankruptcy and Form 1120S insolvency. I’d have to research the other Form 982 exclusions.

What do you do with the amount of S Corporation cancelled debt on line 11 of Schedule B?

That’s very similar to personal insolvency or bankruptcy. But there’s not an analogous IRS Publication 4681, which is essentially the Form 982 instructions for individual taxpayers. For S Corporation cancelled debt from rental real estate, you still have to present IRS Form 4797, Sales of Business Property, for the gain or loss and the final Form 8825, Rental Real Estate Income and Expenses of a Partnership or an S Corporation. So the same reduction of tax attributes applies with Form 982 filed with Form 1120S and cancelled debt sometimes complicates other aspects of Form 1120S tax preparation.

Where can I get information about S Corporation cancelled debt?

Sadly the Form 1120S instructions and the Form 982 instructions don’t help much. I’d go to the underlying tax reporting regulations. Plus there are articles online from the AICPA publications. Maybe your local university subscribes to a tax database. That’s what I used for the first few years of my tax practice.

I’m an S Corporation CPA tax because I operate my firm as an S Corporation and file Form 1120S for it. My specialization in cancelled debt rolled over into the S Corporation tax part of our tax engagements. There isn’t a lot of information about S Corporation cancelled debt. The calculation for Form 1120S cancelled debt, on line 11 of Schedule B, is generally straight forward if there’s an S Corporation Form 1099-C. But then the tax reporting rules get murky. Lots of S Corporation officers prepare their own Form 1120S. Anyone gets good at something they do every year, probably. But S Corporation cancelled debt complicates Form 1120S tax preparation. I offer a free consult. (910) 399-2705.

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