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If my basis in S corp losses is due to money I invested in the company from a loan, and th

at loan was later discharged...
If my basis in S corp losses is due to money I invested in the company from a loan, and th at loan was later discharged in bankruptcy, would I still have the S corp basis and be able to deduct the S corp losses on my tax return? Or would my basis be eliminated even though the debt was two steps away?
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Answered in 8 minutes by:
10/1/2012
Paul K, Esq.
Paul K, Esq., Attorney
Category: Bankruptcy Law
Satisfied Customers: 141
Experience: 10 years Exp., Great customer service, Prompt responses.
Verified

Paul K, Esq. :

Hello, my name is XXXXX XXXXX I would love to assist you. Give me a moment to research your issue and I will answer promptly.

Paul K, Esq. :

Claim a non-business bad debt on as a short-term capital loss on Schedule D of your personal income tax return. Include the debtor's name on Schedule D, line 1, and the words "statement attached " in column A. In the attached statement, include the debtor's name again, a description of the debt, the amount due and the date it became due. Disclose any business or family relationship you have with the debtor, the efforts you made to collect the debt and an explanation of why you have determined the debt is worthless. If you are claiming more than one bad debt, list each one separately and attach a separate statement for each.

Paul K, Esq. :

The Bankruptcy wont eliminate your ability to declare a loss, just your ability to receive payment.

Paul K, Esq. :

Keep track of the BK case, because quite often you are given the opportunity to file a claim and receive anywhere from 100% to 1% of your debt paid.

Paul K, Esq. :

You can take the deduction only in the year in which the debt becomes totally worthless. For example, if your sister didn't repay a loan in 2012 as promised and it becomes worthless in that year because she filed bankruptcy, then you must claim the deduction on your 2012 return.

Paul K, Esq. :

Is this a debt owed to you personally or a company you own?


 

Customer:

hi Paul, not sure if I stated my question accurately enough. Here it is in detail:


 

Paul K, Esq. :

No problem, go ahead.

Customer:

1/ I borrowed $300k and invested in it the S corp


2/ the S corp had losses, which I claimed on my tax return using the basis of the $300k investment


3/ later, I filed a personal bankruptcy and all my debts were discharged, including the $300k


 


(I didn't mean the bankruptcy, believe me).


 


4/ does the discharge affect either my tax return for that year, or my basis in the company (and subsequent ability to personally claim the loss)?


 


thx

Paul K, Esq. :

Did you own the S Corp? Or was it someone else's business you invested in?

Customer:

I owned 20%

Paul K, Esq. :

Did the business file a BK or just you?

Paul K, Esq. :

As far as your own taxes, the discharge doesnt affect it.

Customer:

The company filed a bk in Aug '08.


 


I filed a Ch 7 no asset business case bankruptcy in Jul '09 and received a discharge in Oct '10.

Paul K, Esq. :

As in alot of people think they have to claim the discharge as income because you didnt have to pay the debt. That is untrue however and a discharge is different and you do not pay taxes on it.

Customer:

Sorry, the company in '09 and me both in '10.

Paul K, Esq. :

You can amend your 2009 return to take a loss if you did not do so at that time.

Customer:

That I know, but my question is regarding the basis in the S corp. Is the $300k basis in the S corp still basis for the S corp losses allocated to me even though the money I borrowed to invest in the S corp was discharged?


 

Customer:

So the basis is only valid before my bankruptcy was filed and discharged?

Customer:

Still there?

Paul K, Esq. :

Yes


 

Paul K, Esq. :

Just trying to go through the situation to get an accurate answer

Paul K, Esq. :

THis is more of a tax question than a Bankruptcy question but I am looking for the answer to it.

Customer:

Thx - my accountant said it was a bk question but I appreciate it.


 

Paul K, Esq. :

Most of what I am reviewing says to take the loss on your taxes.

Paul K, Esq. :

The problem is that it is so old, so it might stand out to the IRS.

Paul K, Esq. :

If your accountant did it 2 years ago, it might not stand out as much as attempting to deduct an old debt.

Customer:

that's ok I think, if I am doing the return accurately


 


thank you!

Customer:

or rather he is. I may need a new accountant!

Paul K, Esq. :

Haha. maybe


 

Paul K, Esq. :

I am continuing to look into it

Paul K, Esq. :

I will update further as I find things.

Paul K, Esq. :

Feel free to leave and check back later if you have things to do

Paul K, Esq. :

I like to make sure I look into matters completely before I end so that you have as accurate an answer as possible.

Customer:

I do, thanks. If you find other things, will I get an email update from just answer?

Paul K, Esq. :

Yes you do. But you can also log back in and recheck any updates on this conversation. It remains open so you can check it at anytime without an extra fee or anything to the experts.

Customer:

K thx!

Paul K, Esq.
Paul K, Esq., Attorney
Category: Bankruptcy Law
Satisfied Customers: 141
Experience: 10 years Exp., Great customer service, Prompt responses.
Verified
Paul K, Esq. and 87 other Bankruptcy Law Specialists are ready to help you
Ask your own question now
From everything I am reading, if you have losses from the S-Corp, you can deduct those and also if the S-Corp had assets or sales post-filing, you would be liable for that income against you. Clearly, then if you are liable for the income you get the benefit of the loss. In your BK, I'm sure your attorney fully listed your ownership in the business and as you said, it was a No Asset Case. So from what I see, you should take the loss.

Now all that being said, I am not a tax professional, so make sure your accountant knows what he/she is doing as well.

If you have further questions, just post them here and I can respond accordingly. Thanks and have a great week!!!
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Paul K, Esq.
Paul K, Esq.
Paul K, Esq., Attorney
Category: Bankruptcy Law
Satisfied Customers: 141
141 Satisfied Customers
Experience: 10 years Exp., Great customer service, Prompt responses.

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