As an S-Corp Shareholder, you may have some relief under Sec. 108(a)(1)(D
This deals with what's called "Qualified real property business debt"
THE criteria is the following:
The amount of income that can be exluded is generally, the following:
YOu need to speak with you tax person, this is complicated, but from what you've provided it looks like 183 may apply
To exclude COD income from the discharge of QRP business debt, the taxpayer must make a timely filed election (including extensions) on a completed Form 982 for the tax year in which the discharge occurs. The amount of income excluded by a discharge of QRP business debt reduces the basis of the taxpayer’s depreciable real property as determined under Sec. 1017. The basis reduction is deemed to occur at the beginning of the tax year following the year of discharge.
This is not NEARLY as simple as the couple of entries on a 982 for a residence forgiveness HOWEVER, if this was secured by the real estate and this is an LLC, taxed as an S-Corp it sounds like it WILL apply
THe calculation involve the reduction of what we call tax attributes .. items such as Net operating loss ( For S corporations, the NOL amount is the aggregate amount of the shareholders’ losses or deductions disallowed for the year of the discharge under Sec. 1366(d)(1), including disallowed losses or deductions of shareholders that transferred all of their stock in the S corporation during the year of the discharge)
Capital loss carryovers and others, such as passive activity losses and credits.
To try to calculate this in this venue is neither efficient nor (for you OR me) nor appropriate ... IF the potential tax savings are significant, you need to sit down with a good CPA... but it sound like this DOES apply here
I CAN tell you this: For both entity types (partnerships - or LLCs taxed as partnerships AND S-Corps) , the NOL, capital loss, basis, and passive activity loss attributes are reduced dollar for dollar. The reduction for the other credit attributes is reduced by 33 1⁄3 cents per dollar. ... so, again this is very specific to your situation.
There was no bankuptcy involved. The original loan was taken out in 2001 and signed by previous LLC members So the debt was in name of LLC which I purchased interest in 2010. The property appraisal came out higher than original debt balance, that is how the new lender was able to do the new loan....Does Bullet 1 apply to this?
Full circle to you questions? Yes, you are liable (the the extent of your distributive share on the K-1) THis election, a debe dischagre, uner section 108, would be woprth investigation with a competent CPA or tax attorney (in conjunction with someone woth a historical yax knowledge - your tax person?) of your company
THat has NOTHING to do with bankruptcy - I understand - What this turns on is the fact that the debt that's forgiven here is secured by real estae ... YES bullet 1 IS the link her I believe
Where can I refer my CPA to for this clarification?
Start the conversation with "I believe that the tax on this forgiven debt under section 108, specifically, Sec. 108(a)(1)(D): Qualified Real Property Business Debt
There have been several good articles, and let me see if I can find the tax citation itself for you
Here's the citation to the code (Internal Revenue Code - Title 26 of US code)
Here's the whole pertinent section, but it's sub-part(D) that, I believe, applies here:
This language is not in my understanding, to technical for me.
I will refer my CPA to these codes
Basically ( and your CPA will get this) your LLC-SCorp (would also apply to partnerships) gets to exclude from income (therefore not taxable) the forgiven(in your case debt was renegotiated, but IRS says that's forgiven debt) debt from income
your situation falls under section (d) you are not a C-Corp AND the debt ws secured by real estate AND owned by the business
THis article covers ALL of the sections - just tell him/her to go down to the section that says:
This applies to all debt forgiven before year-end 2014
Hope this helps
Ok......I believe that answers the question for now. Can I come back to you for further help on this question?
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.