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CLIENT HAD CHIROPRACTIC BUSINESS, SUB S CORP. CLIENT CLOSED

BUSINESS, HAD PERSONAL GUARANTEE ON...
CLIENT HAD CHIROPRACTIC BUSINESS, SUB S CORP. CLIENT CLOSED BUSINESS, HAD PERSONAL GUARANTEE ON RENTAL SPACE LEASE. LANDLORD SUED CLIENT FOR BALANCE OF RENT ON LEASE TERM. CLIENT SETTLED WITH EX LANDLORD FOR 50K IN 2012 AND PAID 50K IN 2012. IS THE 52K SETTLEMENT A TAX DEDUCTION ON CLIENTS 1040 TAX RETURN FOR 2012. IF SO, HOW IS IT REPORTED ON THE 1040 RETURN. IS IT ORDINARY LOSS OR CAPITAL LOSS LIMITED TO 3K PER YEAR
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Answered in 8 minutes by:
10/9/2013
Stephen G.
Stephen G., Sr Financial Expert
Category: Finance
Satisfied Customers: 7,211
Experience: Extensive Experience with Tax, Financial & Estate Issues
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Stephen G. :

Hello, my name isXXXXX & I'll be helping you today. My goal is to give you a complete & accurate answer that you can understand.

Stephen G. :

When was the business closed, ie. what year?

Stephen G. :

When was the final S-Corp return?

Stephen G. :

I'd put it on Schedule E under the S-Corp as "Lease guarantee payment", as an ordinary deduction.

Stephen G. :

Questions?

Stephen G. :

If you need to contact me again with any tax or financial questions, you can just ask for "Steve G" at the beginning of your question. Thanks again for using us for your tax and financial questions. You may get a short survey from the site; if it isn't too much trouble I would appreciate it if you would answer it; the survey results are used to rate our performance;

Stephen G. :

Please remember to rate my response, it is the only way we get credit for out work.

Customer:

Business and FInal corp return 12/31/2011

Stephen G. :

That's what I figured; it doesn't change what I'd do; I've had similar situations several times over the years.

Customer:

Did you report on schedule E rental property as other expense or schedule E part 2 income loss from s corp (corp is not active for 2012)

Stephen G. :

Schedule E part 2 - it wasn't active for 2012, but it was active when the guarantee was made and the personal liability arose; my argument is that basically this is rent expense that took "x" period of time to settle. I just go back to what or how it would have flowed through as an S-Corp loss. Now of course, I have no idea what you did on the personal return when you closed down the S-Corp, but if he paid the 50K personally, he had sufficient basis to claim the loss.

Customer:

IN 2011 the schedule E reported the final income that he made and distributed. Basis at the end of 2011 was -0- (all profits distributed) Client left location assuming landlord would not follow him. Not so. In 2012 he was sued and settled. Client paid 50K out of pocket so he has economic basis in 2012 for the payout in 2012.

Stephen G. :

All that is what I assumed. I'd be very comfortable treating it as a loss on Schedule E in 2012.

Customer:

Would it be more likely to be reported on form 4797 part 2 ordinary gain or loss??

Stephen G. :

Not as far as I'm concerned. My feeling is that you got back to what would have happened if there was no litigation. It is unpaid rent that ultimately was paid. That's the way I have treated similar situations in the past. That fact that it has never been questioned doesn't mean anything in practical terms; but I can only tell who what I've done and what I recommend how you handle it.

Stephen G. :

If you need to contact me again with any tax or financial questions, you can just ask for "Steve G" at the beginning of your question. Thanks again for using us for your tax and financial questions. You may get a short survey from the site; if it isn't too much trouble I would appreciate it if you would answer it; the survey results are used to rate our performance;

Customer:

Steve Thanks for all your help It is greatly appreciated I will take your advise and file accordingly (and I agree with your position on the original position of the expense) Thanks again Gary

Stephen G. :

Ok, Thanks for using JustAnswer.com; ask for me again if you have further questions or want a second opinion again;

Customer:

Will do Goodnight

Stephen G.
Stephen G., Sr Financial Expert
Category: Finance
Satisfied Customers: 7,211
Experience: Extensive Experience with Tax, Financial & Estate Issues
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