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Megan C
Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 14163
Experience:  Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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I closed my S corporation this year 2013 and will be filing

Resolved Question:

I closed my S corporation this year 2013 and will be filing a final federal and PA state tax in 2014. I opened the corporation in 2002. As the sole shareholder in the corporation I advanced the corporation funds as a shareholder loan and the balance will remain at the end of this year. How can I best and legally handle this? Can it be taken as a long term capital loss and deducted $3000/yr from my personal income tax until fully deducted?
Submitted: 1 year ago.
Category: Finance
Expert:  Megan C replied 1 year ago.

MyVirtualCPA :

Thank you for your question, and thanks for using JustAnswer.com

MyVirtualCPA :

In order to qualify for the bad debt deduction, this shareholder loan had to be documented with a formal note at a fair interest rate

MyVirtualCPA :

If there is no formal note agreement, the IRS will rule that the advances were capital infusions rather than bona fide loans.

MyVirtualCPA :

A recent court decision in October 2012 dealt with this very issue.

MyVirtualCPA :

The note should also be documented in the formal corporate minutes.

MyVirtualCPA :

If this is not authorized in the meeting minutes and is not formally documented by a note agreement, then the bad debt deduction will be disallowed.

MyVirtualCPA :

See the following article: http://www.schneiderdowns.com/bad-debt-deduction-for-shareholder-loan-to-corporation

MyVirtualCPA :

Do you have any further questions? If properly documented, you would take a schedule d capital loss until fully deducted

MyVirtualCPA :

If no further questions, please take a moment to rate my response as "excellent" so that I may receive credit for assisting you today

JACUSTOMER-do90z2gy- :

OK - At this point (still in 2013) can my attorney and I now create a note agreement covering the shareholder loan and include it in the corporate meeting minutes to permit me to begin deducting the shareholder loan as a bad debt for future deductions against my personal income tax?

MyVirtualCPA :

No, this had to be done at the time the loan was given to the corporation

MyVirtualCPA :

before the funds were dispersed

MyVirtualCPA :

Is there anything else that I can assist you with today?

JACUSTOMER-do90z2gy- :

No - it's just disappointing.

MyVirtualCPA :

I'm truly sorry that I don't have more favorable news.

Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 14163
Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
Megan C and 2 other Finance Specialists are ready to help you
Expert:  Megan C replied 1 year ago.
Thanks, XXXXX XXXXX your positive rating. Please come back and visit MyVirtualCPA for any of your tax, finance, or social security needs. It was a pleasure working with you today.
Customer: replied 1 year ago.

I do have a further question related to my previous question. In addition to the current shareholder loan which I understand I cannot claim as a bad debt, I maintain a separate line of credit associated the business with a commercial bank. I want to pay off this line of credit from my personal funds (a shareholder loan). Based on what you advised me, provided that I have a loan agreement created PRIOR to my transferring the the funds AND I have that loan agreement officially entered into my corporate minutes book then I should be able to deduct that amount as a bad debt on my personal income tax (@$3000/yr). Is that correct?

Expert:  Megan C replied 1 year ago.
Yes, that is correct. You can deduct this if its an official loan. You can refer to the article I linked to yesterday for more details.

Thanks. If you would please rate my response as excellent so that I may receive further credit for assisting today.
Customer: replied 11 months ago.

Megan,


 


In follow up to our communications last month I want to confirm that the actions I have taken will allow a bed debt deduction:


 


Consistent with your previous input and the informational link you provided


 


http://www.schneiderdowns.com/bad-debt-deduction-for-shareholder-loan-to-corporation


 


a non-negotiable promissory note has been created by my attorney confirming the loan I will make to the corporation. This note includes a fixed schedule for repayment, a maturity date, an interest rate, and a demand for repayment. No collateral is obtained or requested. I have not yet made the loan to the corporation nor, obviously have I made any repayments.


 


A Unanimous Written Consent of the Board of Directors for my company (that's me) has been created confirming that the company will cease operations. Both the Promissory Note and the UWC will be entered into the corporate minutes.


 


The company is still in business - but again it is my intention to close the company officially on 12/31/13.



To review, the company has an outstanding loan to a bank which I want the company to pay off using the proceeds from execution of the Promissory Note. The indebtedness will then be from the company to me (the lender) rather than the bank.



What do I now need to do to assure that I am in conformance with the factors outlined in the referenced article?



Does the company need to make a single repayment to me prior to 12/31/13 to demonstrate that a repayment has been made?


 


What may need to be demonstrated relative to item 8 noted in the reference article? Based on what you know is there an issue with respect to the "valid debtor-creditor relationship?"


 


Should the Promissory Note should be dated PRIOR to the UWC?


 


So, here's what I plan to do unless you counsel me otherwise:


 


(1) Within the next week execute the Promissory Note and UWC for inclusion in the Minutes Book.


 


(2) Deposit the note amount in the company's account - and have the company pay off the bank loan.


 


(3) Have the company then make a single repayment to me on 11/1/13.


 


(4) Make a final tax filing for the company in 2014 for tax year 2013. This tax filing will indicate that the company has insufficient funding to repay the loan and a notification will be made to the lender. The loan can then be categorized as a bad debt - which can then be accounted for as such on my personal tax return.


 


Please review and advise - thanks.


 


Bob Bright


 


Expert:  Megan C replied 11 months ago.
Bob,

Sounds like you have your ducks in a row to claim a bad debt deduction.

Please let me know if you need any further assistance.

Thanks again for using JustAnswer.com, and please take a moment to rate my response as "excellent" so that I may receive further credit for assisting you today
Customer: replied 11 months ago.

Megan -



I appreciate your positive response. If I am interpreting you correctly, therefore, then provided I do all the steps which I outlined in my previous note that the valid debtor/creditor relationship should not be a "red flag" - and that I should not anticipate that there will an issue with substantiating the bed debt deduction.


 


Do you concur?


 


Bob Bright

Expert:  Megan C replied 11 months ago.
Bob,

Yes, you should be fine taking the bad debt deduction.

Please let me know if you need anything additional. If not, please rate as "excellent" so that I may receive credit for assisting you today.
Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 14163
Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
Megan C and 2 other Finance Specialists are ready to help you
Customer: replied 7 months ago.

Megan -


 


I have executed all the steps which I outlined to you in my last communication to you on October 9, 2013 relative to claiming a bad debt deduction. (I trust that you can pull that up from your cyber records if you require!)


 


So I am now doing my personal taxes for 2013 on which this bed debt deduction would be claimed. I am unclear as to where on the the tax form this should specifically be claimed and am asking if you could provide me specific guidance regarding how/where this bad debt should be reported. I am using Turbotax Premier to do my taxes.


 


Thanks for your help. Let me know if you require further information.


 


Bob Bright

Expert:  Megan C replied 7 months ago.
Bob,

The nonbusiness bad debt should show up on Schedule D and form 8949 as a capital loss. This will flow through to the front page of your 1040 where you should get a $3,000 deduction against other income.

I am unsure how to do this all in Turbo Tax, so can only speak to generally where the items go on the form itself.

Thanks, and let me know if you need anything additional. If not, please rate positive so that I may receive credit for assisting you today :-)
Customer: replied 7 months ago.

Thanks Megan,


 


I will review Turbotax to see where entries for Schedule D and form 8949 are made. If I have any questions I will get back with you. (PS - I realize that you are not necessarily a Turbotax guru but wanted you to know which program I am using.)


 


Bob


 


 

Expert:  Megan C replied 7 months ago.
Bob - thanks for checking back in. Let me know how I can further assist. Otherwise, please rate positive so that I may receive further credit for assisting you today

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