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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 12679
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I have a question regarding completing the IRS Insolvency

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Hello, I have a question regarding completing the IRS Insolvency Worksheet to make cancellation of debt (student loan interest) tax free.On Line 34, it says Value of Investment In a Business. If my client owns an S-Corp, would I need to enter a figure on this line??? If so, what figure would I report?On Line 12, it says just business debt for sole prop or partner so I assume this is n/a since their business is an s-corp. Please confirm my thinking on that one.Thanks, I've never completed this form so want to make sure I am advising them correctly.

Hi. My name's Lane. I can help you with this.

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The value of the S-corp that IRS wants to see is a willing buyer would pay. (What the taxpayer could get out of the business to pay off the tax debt in this case). There are several ways of estimating this. Capitalizing income is the method that is most universally accepted.

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If you don't have an index of published Cap rates for like kind businesses you can look at sales of like-kind businesses and what they sold for as a product of their profit.

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Example; Company A, with 100,000 of profit each year (including shareholder/employee salary) sells for 700,000. The cap rate there is 100,000 / 700,000 = `14.2%

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Regarding the loan, if it's an S-Corp liability, it would affect what the owner can get out of the business (a loan would lower that net sales price). If the loan is a personal obligation (recourse debt to the taxpayer, becasue the owner personally guaranteed the loan) it would be broken out as a personal liability, with the full sales price of the S-Corp - minus any OTHER S-Corp debt - being listed, while the personally guaranteed loan lowers the net worth as a separate item.

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The bot***** *****ne is that the loan doesn't reduce net worth twice.

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If the owner feels that the best price he would get for the business is simply a selloff of assets you'd use the market value of those assets (again reduced by the liabilities of the corporation IF the liability isn't personally guaranteed).

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An appraisal of the business is another way to go (the business valuation specialist will use cap rate/market comp analysis as one of the methods to value).

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What IRS wan't to see there is a reasonable approximation of its net fair market value - again, what the taxpayer could get ot of the business when selling to a disinterested (not related) third party.

Customer: replied 2 months ago.
Wonderful, thank you so much for the explanation and assistance.I do believe my client would just sell off any assets. They are a contractor so not really a business base or anything for a potential buyer to acquire. So I should have my client come up with a fmv for all assets on the books and then reduce that amount by liabilities that are NOT personally guaranteed to come up with line 34 which is "investment in a business". Then, I would separately list any corp liabilities that ARE personally guaranteed on line 12 "business debts". Or would that go on line 14 "Other liab"??I greatly appreciate your help!

I would use the business debts line. (12)

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Thank you,

Lane

Lane and other Tax Specialists are ready to help you

Thanks much.