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Mark D
Mark D, Enrolled Agent
Category: Tax
Satisfied Customers: 1304
Experience:  MBA, EA, Specializing in Business and Individual Tax Returns and Issues
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Shareholder Bridge Loan to a C Corp that must be forgiven to

Customer Question

Shareholder Bridge Loan to a C Corp that must be forgiven to get new investment into company. Can I take it as a loss?
JA: The Accountant will know how to help. Please tell me more, so we can help you best.
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Submitted: 4 months ago.
Category: Tax
Customer: replied 4 months ago.
is anyone ready?
Expert:  Mark D replied 4 months ago.

Hello

Is the loan to be converted to equity or just forgiven?

Customer: replied 4 months ago.
Hello - Through my LLC I made two loans to the c corp. An a/r revolver and a bridge loan. The bridge loan needs to be forgiven or wiped out in order to attract outside investment. Otherwise whole company goes under. I can't convert it to equity.
Customer: replied 4 months ago.
I am the majority shareholder in C corp and also the CEO of C corp.
Customer: replied 4 months ago.
I don't get a salary so none of it is going to pay me.
Customer: replied 4 months ago.
Is anyone there?
Expert:  Mark D replied 4 months ago.

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?

Customer: replied 4 months ago.
If I cancel this debt the company will be able to raise outside capital and continue operating so the company won't go under. It has plenty of losses so I'm not worried about the gain on company books. The loan has been documented but since I am a related party is that enough to be able to take the loss as non business bad debt loss and offset it against other capital gains that I have?
Expert:  Mark D replied 4 months ago.

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.

Expert:  Mark D replied 4 months ago.

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