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Yes, you will ultimately reduce retained earnings by this canceled debt.
You will have a bad debt expense, and that will be closed out to retained earnings at the end of the accounting period.
So yes - your retained earnings is reduced by the amount of the debt cancellation
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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?
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?
Sorry what is an EA?
Enrolled agent. Never heard before. Do you find them in the phone book with those designations?
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?
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?