Potential large tax debt on S-Corporation Foreclosure?
Posted on October 9, 2008 by admin
annonymous asked:
I owned a business that unfotunately went into foreclosure. The bank has done an auction on the equipment and property and there is still a debt left over on the loan which I personally guarenteed of $350,000+. My accountant is telling me that I may potentialy have to pay a substantial amount in taxes because there is a potentialy large gain from the repossession of the assets because it was part of the cancelation of the debt, yet the debt wasn’t canceled becuase I still owe the debt left on the loan that the proceeds didn’t cover. I was an S corporation. Does this seem right to you and/or do you see another alternative to me not having to pay taxes if there is still a large debt left for me to pay?
I owned a business that unfotunately went into foreclosure. The bank has done an auction on the equipment and property and there is still a debt left over on the loan which I personally guarenteed of $350,000+. My accountant is telling me that I may potentialy have to pay a substantial amount in taxes because there is a potentialy large gain from the repossession of the assets because it was part of the cancelation of the debt, yet the debt wasn’t canceled becuase I still owe the debt left on the loan that the proceeds didn’t cover. I was an S corporation. Does this seem right to you and/or do you see another alternative to me not having to pay taxes if there is still a large debt left for me to pay?
If you end up paying the debt off there will be no tax effect on you. It’s only if the debt ends up being not paid off that you’d have tax problems.
What is your personal financial situation? It makes a big difference. You would realize income from discharge of indebtedness only if the bank forgave part of the debt. Say, for instance, they decided the most they could squeeze your for was $100,000 and settled for that, you would owe tax on $250,000 in income which is better than paying $250,000 at 100 cents on the dollar. You would not owe tax on any discharge of indebtedness income to the extent your are insolvent or if you file personal bankruptcy.
This is a tricky one, and it involves more factors than you’ve spelled out. I’d listen to your accountant, but… here’s something to ask him:
1st – Any debt that is forgiven is income to you. You need a loss to offset it against.
That said, what’s your basis in the property that was sold? If you’ve owned it for a while and have taken a lot of depreciation deductions, or especially if you took a Sec 179 deduction, then your basis is low or zero, and any proceeds from the auction that exceed your basis would count as ordinary depreciation recapture (income to you). However, if you just bought it last year and didn’t take Sec 179, then your basis probably exceeds the auction price, and that would be a Sec 1231 loss (ordinary loss to you). I believe you can use this loss (along with your operating losses) against the debt forgiveness income.
Hope that helps.