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Old 06-14-2013, 01:51 PM
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Final return with debt

The Arizona LLC has gone out of business and I want to do a final tax return, however the LLC still has some debt. This debt can never be repaid as the LLC has no money or assets. This problem arose from real estate. The company who the debt is owed to hasn't sent a 1099C, COD, and I assume they will some time in the future. Normally I would enter a COD in the books and in this case there is an equivalent loss which would offset this income, thus there is no loss or income. The problem is I cannot do the COD as technically they haven't cancelled the debt. Do you have to leave the debt on the books until they send a 1099C, or is there some way that you can do a final tax return now and balance out this unpaid debt with the equivalent unused loss? Are you allowed to do a final tax return if you have unpaid debt?



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Old 06-15-2013, 06:41 AM
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Originally Posted by Chris Read View Post
#1: The company who the debt is owed to hasn't sent a 1099C, COD, and I assume they will some time in the future.

#2:Normally I would enter a COD in the books and in this case there is an equivalent loss which would offset this income, thus there is no loss or income. The problem is I cannot do the COD as technically they haven't cancelled the debt. Do you have to leave the debt on the books until they send a 1099C, or is there some way that you can do a final tax return now and balance out this unpaid debt with the equivalent unused loss? Are you allowed to do a final tax return if you have unpaid debt?


#1:Agreed; as you can see, under the federal tax codes of the US, debt that is forgiven is considered income. According to the IRS, forgiven debt counts as income because it relieves you of the obligation to pay that money back. Under these circumstances, you would receive a Form 1099-C at tax time. The form reports the amount of canceled debt you are expected to claim on your taxes. Lenders must send you a Form 1099-C if more than $600 in debt you borrowed was either canceled or forgiven by a lending institution. Under federal law, you are required to still claim forgiven debt of less than $600 as income on your taxes but you will not receive a Form 1099-C in that situation.The IRS requires financial institutions to report to them the amount of principal they charge-off for individual borrowers. It is only to be filed after they have stopped collection activity and there has been no payment activity on the account for three years. This is not a way for financial institutions to try and collect further. It is an added burden on them to track these conditions and find the records when they meet the criteria for filling. The financial institution had written the debt off years earlier.The state law effect of a form 1099-C varies. Connecticut views it as a signed writing that releases the claim, California does not. Kansas views it as having discharged the claim, but the reasoning of the judge in that case was flawed. In any case where a debtor has defenses to assert against a creditor's claim, SOL should be the last one used because its successful use triggers the requirement for the creditor to issue a form 1099-C. If a defense such as lack of documentation is successful, the 1099-C issue is never reached.
NOTE: You might receive a Form 1099-A instead of a Form 1099-C. The Form 1099-A is sent out when the lender takes back property used to secure a loan, such as a home, or when the debtor gives the property up. However, if the lender repossessed the property and the debt was forgiven during the same tax year, the lender only needs to send you a Form 1099-C, according to the IRS.



#2:So you r question is if you can use your investment property losses to offset cancellation of debt income; it depends.If the property is a rental property or was used in a trade or business, the loss is called a “Section 1231 loss.” Section 1231 losses are applied first to Section 1231 gains. Net long-term Section 1231 gains are taxed as long-term capital gains (subject to special tax rates for any accumulated depreciation) and net Section 1231 losses are deductible as ordinary losses. So, if this is your only transaction and you qualify, the loss can be deducted against the cancellation of debt income.If the property wasn’t rental property or used in a trade or business, such as a vacation home, a second home or unimproved property, the loss is either a non-deductible personal loss or a capital loss, limited to capital gains plus $3,000. In this case, you won’t get an offset against your cancellation of debt income.



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