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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3844
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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We have two s-corp businesses. one is very profitable and the

Customer Question

We have two s-corp businesses. one is very profitable and the other is in debt and will likely close.

What do we do with the losses from the business that is closing? Can the good business buy the bad one's debts?
Submitted: 12 months ago.
Category: Tax
Expert:  Lane replied 12 months ago.

NPVAdvisor :

Hi, Under Title 26, Section 1361 of the U.S. Code, S-Corps are not allowed to have any kind of corporation as a shareholder

NPVAdvisor :

There's one one exception, when one S corp owns another as a qualified Subchapter S subsidiary, or QSSS.

NPVAdvisor :

For that to work, the owning S-Corp has to own ALL of the shares of the Sub-S corp (QSSS) ... and I think think this MAY accomplish what you're trying to do because the QSSS operates like a regular S corporation. It is a legally distinct entity from its owners

NPVAdvisor :

But the term BUYING the loans themselves doesn't really work here because the loans have no market value (You can buy receivables, but you really don't BUY parables, they're a debt) what you MAY be able to do (if you don't want to have the second corporation as a QSSS) is ASSUME the loans (IF the creditors will allow it)

Customer:

We (wife and I) are 100% shareholders of both businesses. is it better to just pass through the loss to our taxes? It is a 30k debt and I don't want to pay 30k in income/payroll tax on one side only to take the 30k loss on the other.

NPVAdvisor :

It will certainly be the cleanest and most tax compliant thing to do ... (let those K-1s flow from each S0Corp to your 1040 ASn they should)

NPVAdvisor :

YOu may want to consider an S-Crop bankruptcy

NPVAdvisor :

It doesn't remove you from the picture (as youunderstand from te pass through status) but it may provide some options for more slowly unwinding things or even paying back under a deferred arrangement

Customer:

will the s-corp bankruptcy affect my credit?

Customer:

it is only 30k of debt so the lawyer fees may not make it worth it!

NPVAdvisor :

I agree ..., the S-Corp IS a separate entity, from an ownership perspective (that's the state law piece), and the Fair Debt reporting and Fair debt collection practices act Do protect you, but whether a credit bureau might pick it us, and claim they have the right (under tha alter-ego theory) may actually be a policy issue for them

NPVAdvisor :

YOU may simply want to dissolve the corporation

NPVAdvisor :

But stricly from a legal perspective,ifyour corporation owes money, dissolution isn't an option, since a dissolution filings requires a final tax return and a resolution of all debts. If the corporation can't settle its debts, its only option may be bankruptcy.

NPVAdvisor :

Dissolving a corporation typically requires a statement to be made to the Secretary of State that accommodations have been made to pay creditors.

NPVAdvisor :

Typically the situation that calls for for bankruptcy is if there are tax obligations for which the corporate principals will be liable AND there are assets that can be liquidated.

Customer:

crap. that sound complicated. I think I will just work on making 30k more and close the business with no debt!

NPVAdvisor :

There is one other option: do absolutely nothing. Stop operating the business. Let the creditors sue the corporation and get nothing. HOWEVER, that comment is applicable only if Minnesota law does not mandate liablity to corporate officers and principals.

Customer:

the bank that holds our line of credit debt holds all of our other accounts so I am not sure how well that would work?

NPVAdvisor :

Ahh, what you may want to do then is simply approach them ans ask for a workout ...

NPVAdvisor :

They know that could easily be less expensive to them that use that last idea

NPVAdvisor :

If they DO come after you or the other person thay'll have to prove that you commingled things and sue under the alter-ego theory

NPVAdvisor :

the burden of proof will be on them

Customer:

one s-corp did provide the other with a loan of 30k so that we were not paying 7-8% interest on the debt. we did it simply by transferring funds. did we just mess it all up by doing that?

NPVAdvisor :

Technically, no .. especially if there was a loan instrument (agreement) and interest was actually paid, ant a reasonable market rate, etc....

NPVAdvisor :

That is CETAINLY one of the things they would have to come after ... but again, you can see how the discovery related to those things , getting subpoenas, paying the lawyer, etc gets expensive for them

Customer:

I can set up the loan no problem

NPVAdvisor :

That's what you'll need to do (would be the best practice, regardless) keeing everything up t snuff on what MN law says are required of S-Corps and keeping ll the bookkeeping separate, etc. is your best defense

NPVAdvisor :

Regardless of which way you go

NPVAdvisor :

I'd dot all the i's and cross the t's and see if you can get a workout that DOESN'T entail actual debt forgiveness

NPVAdvisor :

the S-Corp statusw (that corporate veil) does give you leverage

NPVAdvisor :

I have a meeting at 11:30, (ea) but I can move us to the "Q&A" mode (where you still can ask follow-up questions) Would that be OK?

NPVAdvisor :

Here's an excellent article on the ablity of a court to pierce that corporate veil

NPVAdvisor :

It's been 10 minutes and I still don't see coming back into the chat, so I'll move us to the Q&A mode now ... Maybe that will help ... Let me know if you have further questions

NPVAdvisor :

If this HAS helped, I would appreciate a feedback rating of 3 (OK) or better … That's the only way they will pay us here.


HOWEVER, if you need more on this, PLEASE COME BACK here, so you won't be charged for another question.

NPVAdvisor :

Thanks

NPVAdvisor :

Lane

Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3844
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and other Tax Specialists are ready to help you
Expert:  Lane replied 12 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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If you haven’t already done so, please rate your answer above. Or, you can reply to me using the box below.
Expert:  Lane replied 12 months ago.

Thanks so much Aaron!

If you'd like to work with ME again just say "For Lane only," at the beginning of your next question.

Thanks again,
Lane

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