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Discussion:Bankruptcy and credit card charges deducted in prior year

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Discussion Forum Index --> Basic Tax Questions --> Bankruptcy and credit card charges deducted in prior year


Discussion Forum Index --> Tax Questions --> Bankruptcy and credit card charges deducted in prior year

Jossiecpa (talk|edits) said:

25 February 2013
My client recently filed for bankruptcy and had several personal credit card debts discharged. He had used these credit cards in previous years to make purchases for his business. These purchases were deducted as business expenses on his S-corporation tax return. Now that the debt has been discharged, will he need to report this as income on the corporate tax return in the year in which the debt was discharged? I understand that in bankruptcy, cancellation of debt is not considered income and no 1099-C's are issued. But, what does the IRS require as far as accounting for this? Since the credit cards were in the name of the shareholder, and included as "shareholder loans" to the corp, I would think that his basis should be reduced by the amount of the discharged debt. But, again, is there any income issue here?

JR1 (talk|edits) said:

February 25, 2013
It's been a long time...but I do seem to recall that you have to add back those expenses even tho' it's a bk. If they were deducted as you say. Others may have more insight.

Mscash (talk|edits) said:

26 February 2013
Client paid for business expenses with borrowed money then didn't pay the loan back because of bankruptcy. I don't see how the deductions get reversed.

EZTAX (talk|edits) said:

26 February 2013
Agree with Mscash. Just make sure you look into reducing tax attributes in the following year if appropriate.

Jossiecpa (talk|edits) said:

28 February 2013
So, no adding back of deductions, but reduce tax attributes if appropriate?

Podolin (talk|edits) said:

28 February 2013
The bankruptcy was personal, right? The expenses were deducted at the S corp. level, right? The personal credit card debt was discharged, right? The S corp. still owes the s/h the loan balance, right? Just trying to deal with the facts.

Jossiecpa (talk|edits) said:

28 February 2013
Yes, to all of your questions.

Podolin (talk|edits) said:

28 February 2013
Then there'd be no adjustment on the S corp., right? And the individual did not deduct the expenses, so he, not the corp., would make the attributes adjustments, right?

Jossiecpa (talk|edits) said:

28 February 2013
That sounds about right.

RexT2013 (talk|edits) said:

28 February 2013
Were the loans that the shareholder made to the corporation listed as an asset in the shareholder's bankruptcy petition?

JR1 (talk|edits) said:

February 28, 2013
I get it now, Lenny, thanks for clarifying. I thought both personal and corp went bk...

Podolin (talk|edits) said:

28 February 2013
Were the loans that the shareholder made to the corporation listed as an asset in the shareholder's bankruptcy petition? Rather a good question! I'd bet no.

Ckenefick (talk|edits) said:

28 February 2013
Did he list the value of his stock on the bankruptcy petition?

Podolin (talk|edits) said:

28 February 2013
Ck, how much value would you guess the stock has, given that he had to lend the corp. $ via personal credit card?

Ckenefick (talk|edits) said:

28 February 2013
How much value would the Shareholder Receivable have?

Podolin (talk|edits) said:

28 February 2013
Depends. Prob. very little or none. And we do not know s/h basis in stock or receivable.

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