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rakhi.v
rakhi.v, Tax Attorney
Category: Tax
Satisfied Customers: 3836
Experience:  Have graduated in Law with specialization & emphasis in Financial Laws and has working experience of over a decade.
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I have an accounting problem I need serious help with. Here

Resolved Question:

I have an accounting problem I need serious help with.
Here is the situation:
I have a brother that leased a Van back in 2007 for his LLC Company which was used 100% for business with a price tag of $27,000. It was handled as an operating lease and expensed monthly. It was not put on the books as an asset.
In 2010 the Company ran into financial problems and was unable to make the payments. The Leasing Company was going to take the vehicle, but instead, offered the Company a settlement amount to buy the vehicle in the amount of $12,000. The LLC Company borrowed the money from another source to buy the vehicle from the Leasing Company in late December 2010. The purchase was recorded as an asset and the loan as a liability for $12,000, but the vehicle was not capitalized and depreciated in 2010.
OK, take a breath. The owner of the LLC filed 2010 taxes in January 2011 which is of course filed personally. The Leasing Company then sent the IRS a 1099C for the cancellation of debt for $6900. The IRS adjusted the owners 2010 taxes to reflect the $6900 as income, adjusted all other personal expenses accordingly and sent a tax bill.
The company was insolvent at year end 2010, so I thought the 982 form “Reduction of Tax Attributes Due to Discharge of Indebtedness” could be filed. Since the taxes are filed personally by the owner, I’m not sure how this is to be done? Is it the Company that can be insolvent, or does it need to be the owner that is insolvent? Whew!
Another thing, since the now purchased vehicle was not capitalized and depreciated in the first year, does the owner have to do an amended return anyway so the Schedule C can be redone, and the 2010 taxes redone? If so, is the $6900 recorded as a capital gain?
Just to let you know, the taxes for 2011 or 2012 have not been filed, so before I can move forward, I really need to solve this problem, fix it and move on so the rest of the years can be done correctly. This one is over my head. Can anyone help?
Submitted: 1 year ago.
Category: Tax
Expert:  rakhi.v replied 1 year ago.

rakhivasavada :

Dear Friend, Hello and welcome ...

rakhivasavada :

Complication galore...!!!!!

rakhivasavada :

However, let me try and simplify things for you and make it as crisp and short as possible to avoid confusion.

rakhivasavada :

Let be begin from the end. Since the vehicle was not at all depreciated properly in the first year of operations, you will have to amend that years account. Since you are yet to file your taxes for 2011 and 2012, better amend the prior returns before you move on to avoid any future complications.

rakhivasavada :

Also note that the the LLC members have life beyond and outside the realm of LLC too. So, it is LLC that can be insolvent and not necessarily the partners / members,. You can read more at :

http://info.legalzoom.com/difference-between-insolvent-bankrupt-23667.html
http://smallbusiness.chron.com/disband-llc-partner-insolvent-24244.html

(Both are for general reference only)

rakhivasavada :

Having said this,

rakhivasavada :

Regarding the $6900 debt forgiveness, the figure would remain same. This is because, even if you include and record lease which was not recorded earlier, it would affect the final taxable income, and NOT this amount that was forgiven.

HOWEVER, the final tax bill would change. But this amount of $6900 would continue to remain the same amount of debt forgiven.

rakhivasavada :

I am of the strong opinion that you better hire a local CPA or EA to do this job for you. You have already messed up a lot and there are great chances that you might get confused and lost with this. The botXXXXX XXXXXne is that you will have to amend your tax return and then file the ones that are not filed and move on.

rakhivasavada :

Rate this answer ONLY IF you are done with this and if this helps and satisfies you as this is the only way we get compensated for assisting you. You may use "CONTINUE CONVERSATION" to revert with additional queries if you have or if I have missed out on any aspect of your question.

Hope this helps...
Warm Regards

Expert:  rakhi.v replied 1 year ago.
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Customer: replied 1 year ago.

I just want to reiterate what you are saying. The 2010 taxes need to be amended so the vehicle can be capitalized and depreciated as well as the $6900 recorded as income? The LLC is only 1 member. In 2010, the liabilities exceeded the assets by $5500. Can he not file a 982 reducing the tax liability for the company up to the $5500?


Also, I am not the one who messed this up. I am only trying to help fix it.

Expert:  rakhi.v replied 1 year ago.
Dear XXXXX,

As you know, form 982 is used to determine under certain circumstances described in section 108 the amount of discharged indebtedness that can be excluded from gross income.

The form 982 shall NOT apply because if has the following pre-requisites before that can be used. It is applied when:

1.Discharge of qualified principal residence indebtedness
2.Discharge of indebtedness in a title 11 case
3.Discharge of indebtedness to the extent insolvent (not in a title 11 case)
4.Discharge of qualified farm indebtedness
5.Discharge of qualified real property business indebtedness

Even the point 3 shall not apply as it only applies such insolvency occurs in business of farming.

So 982 shall not apply. You will have to amend 2010 tax returns.

I understand that you are trying to fix this up. I do not mean that you created this mess, I am sorry if you understood it that way. I just described the situation as confused one..!!

Rate this answer ONLY IF you are done with this and if this helps and satisfies you as this is the only way we get compensated for assisting you. You may use "CONTINUE CONVERSATION" to revert with additional queries if you have or if I have missed out on any aspect of your question.

Hope this helps...
Warm Regards
Customer: replied 1 year ago.

I thought that point 4 was for the business of farming and point 3 was other business not in 11?

Expert:  rakhi.v replied 1 year ago.
Dear XXXXX,

This point no. 3 too shall not apply. Let me explain.

This point says that "to the extent insolvent". How much or till what extent the firm was insolvent ? This is the question that applies. The firm was never officially declared insolvent, just that it did not had any money...!!

Furthermore, though insolvent, the firm has not gone for liquidation (I mean, official liquidation) and I fill this still shall not apply and requires amending the 2010 returns.

Rate this answer ONLY IF you are done with this and if this helps and satisfies you as this is the only way we get compensated for assisting you. You may use "CONTINUE CONVERSATION" to revert with additional queries if you have or if I have missed out on any aspect of your question.

Hope this helps...
Warm Regards
rakhi.v, Tax Attorney
Category: Tax
Satisfied Customers: 3836
Experience: Have graduated in Law with specialization & emphasis in Financial Laws and has working experience of over a decade.
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