Have a Tax Question? Ask a Tax Expert
Is the loan to be converted to equity or just forgiven?
Thanks. The LLC would take a capital loss for non-business bad debt (I know that sounds wrong, but that is what it is). The C-Corp would have Cancellation of Debt Income (CODI), which would be taxable income. However, if insolvent, the C Corp could file Form 982 with the return and exclude CODI to the extent insolvent. Because this is a related party transaction, you will want to document well how this was a necessary business practice. Does that answer your question?
Assuming the LLC is a flow through entity (no C-Corp election) the capital loss will flow through to your personal taxes. There it can offset cap gains in full, or up to $3K of ordinary income. Anything unused will carry forward.
Did that answer your question? If so, please rate my service