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BK-CPA, Certified Public Accountant (CPA)
Category: Tax
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Experience:  Owner of a CPA firm
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If you file business bankruptcy in a sub s company do accrued

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If you file business bankruptcy in a sub s company do accrued losses become gains for individual tax purposes?
Submitted: 6 years ago.
Category: Tax
Expert:  BK-CPA replied 6 years ago.

Not generally.


You can only deduct losses from the operations of an S-Corp if you have basis in the S-Corp from equity contributions and/or amounts loaned by you to the S-Corp. If you are personally liable for the S-Corp's debt, then having the S-Corp file bankruptcy will still leave you on the hook but entitled to the deduction as well. On the other hand, if you are not liable for the S-Corp's debts, then you (should have) never deducted the losses from operations in excess of your basis in the first place, and your basis would be $0 with carryover losses in excess of basis that could remain permanently undeductible.


If you have taken deductions via your S-Corp operations that exceed the amount of money you put into it / loaned to it (ie, exceed your basis), then you should likely amend your prior tax return(s) for years where you claimed excess deductions. Any deductions claimed in excess of basis will lead to income.


Thank you for your question.


Customer: replied 6 years ago.

We did have basis for the losses. We also have personal guarantees for some of the debt but it's with the sba from a 9/11 disaster loan and they have already attached my husband's social security. of course he will have to live to 500 to repay it.

Can we keep the EIN and file federal returns but close operations in the states we used to operate in? if the economy ever improved we may reopen the company--doubtful at this time but you never know. i have gotten conflicting information on that. the irs told me yes we could but the state said they didn't know.

Expert:  BK-CPA replied 6 years ago.

You generally cannot file a final federal return until all assets and liabilities can rightfully be written off the balance sheet. Once you have cleared all assets and liabilities, then it would likely be wise to file a final return until you resume operations in future years (take your losses on your basis, avoid filing requirements). Getting a new EIN takes 30 seconds, but trying to go through the process of keeping a dormant one open for a BK'd company is going to be a lot of trouble (filing $0 returns every year is pointless, which you should not do for a company closed down with the state and having no activity, no...).


If you do no business in any state, then the only state you would perhaps have/want to file in is the one your company is organized in. Depending on what your home state is for the company, you may have no filing requirements for tax purposes (New York does though...). You furthermore have the option of closing down your corporation with the state, yes, and continuing for federal purposes with the EIN, but, any reportable tax information will have to be reported to both the state and federal governments regardless, so don't think that shutting down equates to no reporting requirements, no.

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