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Megan C
Megan C, Certified Public Accountant (CPA)
Category: Finance
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Experience:  Licensed CPA, CFE, CMA who teaches accounting courses at Master's Level
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RE: does cancellation of debt by a corporation (C corp) reduce

Customer Question

RE: does cancellation of debt by a corporation (C corp) reduce retained earnings?

I owe my corporation in which I'm the sole shareholder about 250K, however, I went through a personal bankruptcy and included that debt in the bankruptcy which was discharged in August 2013. My plan is to file form 982 on my personal tax return so I won't have to pay taxes on the debt cancelled by the corporation/bankruptcy. Also, I want to reduce the corporation's retained earnings by the same amount. Can I do that since the corporation suffered a loss on a debt it was owed?

Note, I'm trying to dissolve the corporation but need to get rid of the retained earnings.
Submitted: 5 months ago.
Category: Finance
Expert:  Megan C replied 5 months ago.

Megan C :

Thank you for your question, my name is XXXXX XXXXX X will be happy to help you today

Megan C :

Yes, you will ultimately reduce retained earnings by this canceled debt.

Megan C :

You will have a bad debt expense, and that will be closed out to retained earnings at the end of the accounting period.

Megan C :

So yes - your retained earnings is reduced by the amount of the debt cancellation

Megan C :

Do you have any further questions?

Megan C :

If no further questions, please rate me positively so that I may receive credit for assisting you today

Expert:  Megan C replied 5 months ago.
Our chat has ended, but you can still continue to ask me questions here until you are satisfied with your answer. Come back to this page to view our conversation and any other new information.

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Expert:  Megan C replied 5 months ago.
Dean,

I see we had trouble and you could not join our chat. If you would, please review my response. Reply below if you have questions. If no further questions, please rate positive so that I can get credit for assisting you today.
Customer: replied 5 months ago.

Megan, thanks for the response. Could you tell me what form would the corporation issue me as the individual? Wouldn't it be a 1099c?


 


And do you think IRS would very well challenge my cancellation of debt since my corporation is run by me as the sole shareholder? In other words, I would think they would want to audit me and try to extract whatever they could?

Expert:  Megan C replied 5 months ago.
Thanks for your reply, Dean. The corporation only has to issue a 1099-C if they are in the business of lending money. They do not have to send you any tax forms.

The IRS will not challenge your cancellation of debt, because it was included in your bankruptcy. So, I would not worry about this.

Please 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 5 months ago.

Wow, thanks for the quick reply! :)


 


I suppose it would be wise to hire a tax expert to my corporation taxes (although it may no money in 2013 because I'm trying to close it out.) Would you have any suggestions of how to find a good tax person? I've used CPAs in the past but should I look for someone else? I think on the personal side I would just file the 982 form and then just file my individual return as I normally do?

Expert:  Megan C replied 5 months ago.
Yes, I would always hire a tax expert when you have issues like this. You can use a CPA or an EA. An EA may be less expensive, and they are accredited by the IRS directly.

Yes, you would file form 982 along with your normal return as usual.

Please let me know if you need anything further. Thanks! And don't forget to rate positive once you have the information you need.
Customer: replied 5 months ago.

Sorry what is an EA?

Expert:  Megan C replied 5 months ago.
An EA is an Enrolled Agent. They pass a test administered by the IRS. In the IRS eyes, they are equal to CPAs. Many of them, all they do are taxes.

But, a CPA will do the trick as well.

Thanks!

Megan
Customer: replied 5 months ago.

Enrolled agent. Never heard before. Do you find them in the phone book with those designations?

Expert:  Megan C replied 5 months ago.
You can find them, HERE

Thanks, XXXXX XXXXX don't forget to rate positive so that I may receive credit for assisting you today.
Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 10431
Experience: Licensed CPA, CFE, CMA who teaches accounting courses at Master's Level
Megan C and other Finance Specialists are ready to help you
Customer: replied 5 months ago.

Hi Megan:


Since I did a bankruptcy this year I'm expecting a 1099c from my creditors. I think all I need to do is file the 982 form to counter act any income that could cause. My question is should I wait until they send me the 1099c hopefully year end, but if they don't, then is there no need to be concerned with that creditor's forgiven debt?


 

Expert:  Megan C replied 5 months ago.
Dean,

Whatever debt was forgiven, you need to account for on form 982 even if you do not receive a 1099-C.

Thanks

Megan
Customer: replied 5 months ago.

Thanks Megan.


In the Corporation books when cancelling out the retain earnings with the debt cancellation how would I journal entry that? (I use Quickbooks). Would it be an expense and call it something like "Bad debt expense" or whatever.


Say for example the debt forgiveness is $200K and say the retained earnings is the same amount. How would a 200K loss (since there was no profit that year) cancel out the retained earnings so on the balance sheet the retained earnings would be zero?


 

Expert:  Megan C replied 5 months ago.
Dean,

Yes, you would set the journal entry to bad debt expense. This would help you wipe out the debt.

Please let me know if you need anything additional. If not, please rate my response so that I may receive credit for assisting you further.

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