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Closing an S-Corp w/outstanding shareholder loan to corp

Level 1

I want to make sure I'm doing this right...

An S-corp is closing down with an outstanding loan from its sole shareholder. It's not going to be repaid. The corp recognizes forgiveness of debt income. It's in Illinois so the corp has to pay the replacement tax on the income. For the shareholder, the  income from the S-Corp is reported, but it is offset by a business bad debt loss that is reported on Line 8 of Part 1 for the loan that is not being repaid.

Make sense?

Thanks.

Rich

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3 Replies 3
Level 15

What's the nature and size of this debt? Was an actual note payable document written up? Was there imputed interest or any interest paid all this time? Have there been any loan payments made at all? Is there some reason you would not treat this as additional paid in capital, and not forgiven debt?

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Level 1

Thanks qbteachmt.

Cash flow advances over $400k. No. No. Try to avoid those as the loan has been used for basis. No, never thought of that as on option before, but with the closing of the organization, I think that should work.

I would think that the change in treatment causes income for the loan basis that's been used on prior losses. Is that correct? Would I be correct in thinking that there's now stock basis that has no value that would offset that income?

Thanks again.

Rich

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Level 15

"Try to avoid those as the loan has been used for basis"

So, it's not legitimate debt.

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