Terry D EA Posted January 29, 2014 Report Share Posted January 29, 2014 I need to see if anyone can lead me to some indepth information regarding related party transactions. I have an S-corp single shareholder that is also the single mananging member of an LLC that is taxed as a disregarded entity. Here is the skinny on this. The building the S-corp has been operating from is owned by the LLC. Thus same shareholder and managing member. The S-Corp has rent payable due to the LLC in excess of the S-Corp assets which would leave the S-corp insolvent. Can the LLC forgive the debt, issue a 1099-C to the S-Corp? Also, I understand the S-corp would have to include the forgiven amount in income but that amount doesn't pass thru to the shareholder. Next question, can the LLC deduct the loss due to the charge off? Obviously this would benefit the the single managing member and offset some gain on the sale of the building that took place this year. My concern again is the related party issue. In the grand scheme of things, and at the very least, this looks a little fuzzy to me. Others opinions please or lead me to some research information. Quote Link to comment Share on other sites More sharing options...
Richcpaman Posted January 29, 2014 Report Share Posted January 29, 2014 Terry: Sounds like your client has some tax problems. He deducted rent in the S-corp for payment to the LLC which owned the building. Then carried a rent due on the LLC, but, he deducted it on the S Corp and never picked it up most likely in the LLC. So, he dodged taxes there. Now, in the defunct S-Corp, he wants to write off the Debt with a 1099-C that *doesn't* pass thru (although it *can* create basis for a shareholder...), and then pick up a loss from the rent not paid. Ok. Sweet, lets deduct it again... And then he just sold the building, hopefully to an unrelated party for a nice profit, and owes taxes on the sale... So, how can we create a loss out of thin air? If we were working for one of the "Final Four" I am sure the boys there could have ran the sale, with knowledge before hand, thru three or four entities and hide the profits that way... But, we don't. Technically, I would draw a straight line thru the entire deal, and end up with this: He underreported the rent collected, and over deducted in the S-Corp. Then he sold it for a profit. All the pockets are the same. Therefore, I would ignore all the rent back and forth because it is bogus. And report the sale on the building. I could be wrong. But issuing that 1099-C? Would look like mal-practice to me. Unless, you have more info that you haven't provided, and I am just paranoid. Rich 1 Quote Link to comment Share on other sites More sharing options...
Lee B Posted January 30, 2014 Report Share Posted January 30, 2014 The rent was never deductible in the S Corp in the first place because of related party rules. Assuming the LLC is cash basis, more than likely, there is no debt to forgive, unless the unpaid rent was converted to a legal note with stated interest and regular payments. If the S Corp has been taking a deduction for the unpaid rent and letting that flow to his 1040 you have a big problem, both the 1120 S returns and the 1040 returns will need to be amended. Potentially, accuracy penalties will apply, if not worse! 1 Quote Link to comment Share on other sites More sharing options...
Terry D EA Posted January 30, 2014 Author Report Share Posted January 30, 2014 Okay I would agree with both of you and I am genuinely concerned about the related party rules here. When the business was profitable the rent was deducted from the S-corp expenses and claimed as income to the LLC which as we know, both of the entities are pass thru. After the trouble began for the S-Corp, the rent payable was not deducted from the S-corp simply because it was not paid which created the rent payable account on the S-Corp side. The LLC has never shown a rent due. This I have controlled simply because of the related parties rules. Yes, one of the things here is to reduce some gain on the sale of the building if possible and the other thing is to remove the rent payable legitimately from the S-Corp books which the bookkeeper entered the payable when I told her not to. If our only course of action is to delete the payable then so be it. They are using QB and I am concered about the audit trail that can show every entry and am trying to avoid any potential problems if audited. I have not been comfortable with the forgiven debt idea from the start. Quote Link to comment Share on other sites More sharing options...
Richcpaman Posted January 30, 2014 Report Share Posted January 30, 2014 Terry: Even without the related party rules... If you kept both entities on the cash basis for taxes, then the accrued rent in the S-Corp went nowhere and doesn't matter. I wouldn't worry about any audit, if questioned, it a simple answer: "its never getting paid, and should not have been accrued, and they were cash basis.." Do a AJE at year end or business term date reversing the entry. Nothing changes for the LLC at that point. If the clients business went bankrupt, that sucks, but if he sold the building for a profit, then that lessens the pain... Rich Quote Link to comment Share on other sites More sharing options...
Mr. Pencil Posted January 30, 2014 Report Share Posted January 30, 2014 can the LLC deduct the loss due to the charge off? This is a common question for Schedule E (which I assume is where he is reporting the disregarded LLC). The answer is that, unless he used accrual method to count the rent as taxable income, uncollected income is not the same as a bad debt. On the other hand, I don't think the S-corp has a cancellation of debt. It doesn't sound like the relationship was maintained in a business-like way. I would guess it was not a legally enforceable obligation, since it continued after there was no reasonable expectation of payment. Quote Link to comment Share on other sites More sharing options...
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