S corp cancellation of debt

19 Replies

essjay

Allstar

06/18/11 8:37am PDT

I have not had the exact situation come up before but my experience tells me this:

If it does not qualify for exclusion you know its taxable. Furthermore it is not subject to self-employment. I would enter it where it gets the proper treatment (interest, dividends...etc-no SE tax) along with a program note explaining the entry. I think that it should e-file.

"Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that rnethod which best pays the treasury..." Judge Learned Hand - U S Court of Appeals

New Member

06/18/11 1:09pm PDT

It is not taxable. Section 108 provides that the exclusion of COD income and the reduction of tax attributes are applied at the corporate level. The company is insolvent. It is excluded at the S corp level and is properly reported on form 982 Reduction in Tax Attributes. I just can't find that form (982) in the Proseries program for 1120S. I easily find it in Proseries' program for 1040, but since the reduction in tax attributes is applied at the corporate level, it would need to be reported on form 982 with the 1120S, not at the shareholder level (1040).

Does anyone know if Proseries 1120S has a form 982, or do I need to do it manually (and therefore not be able to e-file)? Thanks for your response, though!

Accountant Community AllStar

06/18/11 2:23pm PDT

http://www.irs.gov/pub/irs-pdf/i1120s.pdf Read theinstructions. Same for 982. Page 1, Part III seems to indicate that the 982 is attached to the 1040 which would still allow efiling. Nowhere in the instructions does it say that it can be attached to an 1120-S.

Is it time yet?

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New Member

06/18/11 5:01pm PDT

Clearly, I'm not being clear with my question. I have read all the code sections, publications and instructions.The Reduction in Tax Attributes (Form 982) is done at the corporate level (1120S).

Forget the e-file part. I can't find in PROSERIES (my tax filing software package) where to complete the form 982 at the corporate level. Does anyone know if this can be done in PROSERIES?

Please note: it IS done at the corporate level (1120S). All the codes and pubs say so. The question is: can it be done in PROSERIES?

Cute cat, tilt53!!! Looks like Eddy Buddy (my cat).

Accountant Community AllStar

06/18/11 5:09pm PDT

Thanks for the cat kudo. Where in the instructions for the 1120S do you see instructions for the 982? I'm more than willing to learn, but doing a search through those instructions with the word "cancellation" does not lead me to the 982.

New Member

06/18/11 6:26pm PDT

Where does it lead you? If different than 982, then where? I want to learn, too.

I have read section 108 in its entirity, and specifically, subsection 1.108-7(d) which states that the S corp reduces its own tax attributes. The IRS provides form 982 for the purpose of reduction of tax attributes.

The instructions for form 982 state that you use the form to 1. indicate why COD is excluded, and 2. report the reduction of tax attributes. Nowhere in the form or instructions does it say it is for a 1040 or an individual. Further, the instructions say to file the form with your federal return for a year of COD being excluded under 108(a) (insolvency). In this case, the federal form is 1120S. (The form excluding the COD income.)

Pub 908 states that S corps cancellation of debt due to insolvency applies at the corporate level.

Instructions for 1120S page 12 middle column half-way down under Cancelled debt exclusion says see form 982, and pub 908.

Does PROSERIES support this form at the corporate level?

Accountant Community AllStar

06/18/11 8:55pm PDT

Maybe this is too simplistic, but I think you make the adjustment at the corp level and then do the reporting on the 982. The entry on the 982 is basically 1 number.

New Member

06/20/11 8:29am PDT

Yes...I believe you do the reporting on form 982. My question is:

CAN YOU DO IT IN PROSERIES TAX SOFTWARE???

At this point it doesn't really matter...I have already done it manually.

I would have thought this would be something that some other PROSERIES user would have run accross at some point. I guess not.

Accountant Community AllStar

06/20/11 9:10am PDT

Since the 982 goes with the 1040, yes it is part of the software package.

New Member

06/20/11 9:19am PDT

So, are you saying that you think the shareholder reduces the tax attributes of the s corp at the individual level (1040)? That is not what all the regs, pubs and instructions say.

I don't think I am getting anywhere here because I keep asking if the form 982 can be done on the 1120S by proseries software, but I keep getting tax advise.

I appreciate this dialouge (and I love your cat), but I think you are ignoring my question. I believe that the form 982 should be attached to the 1120S, based on my research. My question is whether this can be done in proseries. (On the 1120S).

Thanks.

PhoebeRoberts

Accountant Community AllStar

06/20/11 7:22am PDT

It's a Sch M book-tax difference. Income for book, but not for tax.

If I wanted phone calls, my phone number would be in my profile. If you have a question, post it in the applicable forum.

New Member

06/20/11 8:24am PDT

True...it isa schedule M, but I believe you have to reduce the tax attributes in order for it to be non-taxable (on form 982).

COtaxprep

Contributor

06/20/11 10:01am PDT

I have been interested in this thread. I think I may agree with the link on tilt's post. The S-corp instructions says to "make an election". porseries does not have that particular election but does have a place for misc elections. also the S-corp instructions continue to link to rev proc 2009-37 and they again say to make an election and then make sure you let the shareholders know all the details on the k-1.

08 Additional Requirements for an S Corporation Making a § 108(i) Election.

(1) Information filing on Schedule K-1 (Form 1120S). For the taxable year in which the § 108(i) election is made, the S corporation must report on the Schedule K-1 (Form 1120S), Shareholder’s Share of Income, Deductions, Credits, etc., in the manner specified in the instructions to the forms, for each shareholder § 108(i) information on an aggregate basis for all applicable debt instruments for which a § 108(i) election is made. S corporations reporting § 108(i) information on the 2008 Schedule K-1 (Form 1120S) must report for each shareholder, on an aggregate basis for all applicable debt instruments for which a § 108(i) election is made, the shareholder’s share of the S corporation’s:
(a) COD income deferred under § 108(i) that the shareholder must include in income in the current taxable year under § 108(i)(1) or § 108(i)(5)(D)(i) or (ii), in box 10 (“other income”) using code E;
(b) OID deduction deferred under § 108(i)(2)(A)(i) that is allowable as a deduction in the current taxable year under § 108(i)(2)(A)(ii), or § 108(i)(5)(D)(i) or (ii), in box 12 (“other deductions”) using code S;
(c) COD income deferred under § 108(i) that has not been included in income in the current or prior taxable years, in box 17 (“other information”) using code T; and
(d) OID deduction deferred under § 108(i)(2)(A)(i) that has not been deducted in the current or prior taxable years, in box 17 (“other information”) using code T.
(2) Election information statement provided to shareholders. The S corporation must attach to the Schedule K-1 (Form 1120S) provided to each shareholder for the taxable year in which the § 108(i) election is made, a statement satisfying the requirements of this section 4.08(2). The S corporation should not attach these statements to the Schedules K-1 that are filed with the Service, but must retain these statements, and each shareholder must retain that shareholder’s statement, in their respective books and records. A statement meets the requirements of this section 4.08(2) if the statement—
(a) Label. States “Section 108(i) Election Information Statement for Shareholders” across the top.
(b) Required information. Clearly identifies for each applicable debt instrument to which an election under § 108(i) applies, the shareholder’s share of the S corporation’s—
(i) COD income that the S corporation elects to defer under § 108(i);
(ii) COD income deferred under § 108(i) that the shareholder must include in income in the current taxable year under § 108(i)(5)(D)(i) or (ii);
(iii) OID deduction deferred under § 108(i)(2)(A)(i) in the current taxable year;
(iv) OID deduction deferred under § 108(i)(2)(A)(i) that is allowable as a deduction in the current taxable year under § 108(i)(5)(D)(i) or (ii); and
(v) Additional COD income that would be deferred as described in section 4.06 of this revenue procedure.

New Member

06/20/11 10:37am PDT

I would totally agree to all that, but I am not refering to the 108(i) deferral and ratable inclusion of income arising from business indebtedness discharged by the reacquisition of a debt instrument,

but rather

section 108 (a)(3) insolvency exclusion, and

section 108 (b)(2)(A) regarding the reduction of tax attributes, and in this case the first tax attribute to reduce is the NOL (and I know S corps don't have NOL's, but pub 908 addresses this and explains that for these purposes, the passthrough loss and any carryforward loss due to basis limits is considered NOL in the case of S corps).

So, while I could be totally off base here, I still believe the 982 is attached to the 1120 S, and the amount of cancellation of debt is reported to the shareholder on their K-1, but after it has been dealt with at the corporate level (by the 982 reduction of tax attributes).

See also,

Subsection 1.108-7(d)Special rules for S corporations (1)In general. If an S corporation excludes COD income from gross income under section 108(a)(1)(A), (B), or (C) the amount excluded shall be applied to reduce the S corporation's tax attributes under paragraph (a)(1) of this section. For purposes of paragraph (a)(1)(i) of this section, the aggregate amount of shareholder's losses or deductions that are disallowed for the taxable year of the discharge under section 1366 (d)(1), including disallowed losses or deduction of a shareholder that transfers all of the shareholder's stock in the S corporation during the taxable year of the discharge, is treated as the net operation loss attribute (deemed NOL) of the S corporation for the taxable year of the discharge.

Note this paragraph is effective for discharge of indebtednessoccurring on or after October 30,2009.

Accountant Community AllStar

06/20/11 11:15am PDT

Where, where, where are you coming up with anything saying that the 982 is attached to the corporate return? Nowhere in the instructions for 1120-S does it say anything about attaching a 982 to the corporate return.