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PDtax
PDtax, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 4311
Experience:  35 years tax experience, including four years at a Big 4 firm.
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I would like this Corporate Tax question directed to a CPA

This answer was rated:

I would like this Corporate Tax question directed to a CPA if possible.

I recently had a discussion with another Just Answer CPA about this subject but I have some unresolved doubts.

I suspended a Chapter S Corp in the first quarter of 2013. (I did not go out of business or dissolve the corporation.). I owe a considerable amount to my vendors. Since the company has no assets I will be filing Chapter 7 to protect myself.

The previous discussion was pertaining to changing the reporting method for this years Corp return as the loss will be much greater. The rep informed me that I would have to file IRS form 3115 to do this. The reason for this as my "loss carryover" potential would be greater.

I have looked at the form and the instructions and it looked rather daunting. I am thinking that a CPA should be involved but I can't afford to hire one this year.

My concerns:
1. I might be getting in over my head doing this myself. (I use TurboTax for business and it has form 3115).
2. I could open myself up to an audit or other scrutiny from the IRS.
3. I have some moral issues as it is unlikely the expenses that would be listed by changing to the accrual method will ever be paid.

PDtax :

Welcome to the site. I'm PDtax, and saw the question and response you asked about this subject.

PDtax :

to Q & A; I have some thoughts not previously addressed...

Customer: replied 3 years ago.

I just got online to you still want to chat?

Hi Michael,

Your questions really revolve around corporate debts and a failing s corporation. Bankrupting personally seems like it's your choice, but you didn't address why this is needed. You also seem to think that you are personally liable for many of these debts. Please confirm that.

Changing from cash to accrual basis for the s corp really doesn't do much for you in bankruptcy. Sorry that the previous question and answer didn't address this at all.

Your s corp passes through losses to you up to your basis and at-risk limitations in the s corp. If your s corp has run up significant losses, it's likely that you have used up your basis (and at-risk limitations), and additional losses would not be usable. Your focus on creating accrual basis losses that you admit are not legit (the debts accrued will not have to be repaid) is misguided.

In personal bankruptcy, you will be allowed to keep certain exempt property, and your personal debts in excess of assets extinguished (except for those not eligible for relief, like trust fund recovery penalties, etc.). Tax losses you create by switching to accrual may not survive the petition. Hard to say without a full review of all the facts.

You also seem to think that you are personally liable for the debts of the S corp. Again, unlikely, and certainly premature without a review of the arrangements. Also, any guarantees you are liable for may have tax consequence, as they likely do not generate at risk or basis.

A review of these rules and your specific facts are imperative before you file. It is possible, for example, to just dissolve the S corp if you aren't personally liable for the debts. There are a number of issues to review with a bankruptcy attorney before looking at the tax side of things.

In personal bankruptcy, the tax attributes you might generate, like a usable S corp loss, are reduced by application against debt forgiveness income. Generating a larger S corp loss by 'going accrual' is meaningless when you lose the benefit against the debt forgiveness income.

There's a lot to this subject, but my take on it is that you were focused on creating a tax loss without determining if you could use it or even if your personal bankruptcy was appropriate. applying for a change of accounting method via Form 3115 is a lengthy, challenging application, and likely worthless to you. That's why I responded, and reviewed your question.

A tax professional in your area, one with bankruptcy experience, and a bankruptcy attorney will be invaluable. Do not try to do this yourself, or even with the input of Just Answer CPA's.

I'm PDtax. Ask any follow up you like, or leave positive feedback to close out your question.
Customer: replied 3 years ago.

Thank you for your lengthy and astute answer. I had a gut feeling that switching accounting methods might cause more problems than it would solve - the idea being that there may be some extra losses I could write off in future years.


 


A good share of the S corp debt has a personal guarantee. I have retained an attorney for Chap 7 bankruptcy so my personal liability will inevitably be removed. (The S corp has no assets and has not been operating for 6 months).


 


I would say based on your answer it would be foolhardy to pursue the accounting change plus it will make things simpler for me as far as filing my tax returns.


 


Unless you have any further input, I thank you for your reply and saving me from a possible huge mess.


 


If I don't hear back from you soon I will go ahead and close the question with an excellent rating.

I was just shutting it down for the night, and saw your response. I appreciate the feedback. Having an attorney is needed to navigate the bankruptcy, and a tax pro will be worth their fee many times over.

For example, did you know you could elect to split your personal income tax year into two years, a short period 1040 for the income pre-bankruptcy, and a 1041 for the bankruptcy estate to report the debt forgiveness income, etc.? It can often create significant tax savings if your income facts support it. A bankruptcy tax pro will know.

Your positive feedback, and a bonus if warranted, lets management know you are pleased with my work.
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