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You are here: Experts > Business > Corporate Law > Tax Law (Questions About Taxes) > S-Corporation and 1099-C
Expert: John Kirk, CPA
Date: 7/16/2008
Subject: S-Corporation and 1099-C
Question
QUESTION:
I have a small retail business with property under S-Corporation. I and my partner, each are 50% shareholder. My business is in foreclosure status. After foreclosure sale, if my lender issues 1099-C for the "Mortgage Debt Foregiven" then am I liable for the taxes personally. I heard that since I have S-Corporation, which involves a business property then I am not liable for the taxes? Is that true? Also, If I am liable for taxes then Can I show 1099-C income as dividend in my personal tax return so I do not have to pay taxes on them? Please guide me what is the best way to solve this problem? I would really appreciate your help. Thank you.
ANSWER: As a shareholder in an S-Corp the foreclosure would result in taxable income to the corporation. Which would be distributed to you. You will pay tax on the income no matter how you distribute the income.
John Kirk, CPA
www.johnkirkcpa.com
---------- FOLLOW-UP ----------
QUESTION: What is the best way to avoid taxes? What if the business is insolvant at the time of foreclosure? Please help me.
Answer
The taxes cannot be avoided. The fact that the business is insolvent has no bearing in this case. It would have been better if the s-corp election was broken, than the tax would be on the corporation and not you personally. Then the Corporation could declare bankruptcy and the tax would be avoided.
However for this method to work the shareholders would have to be clear of any obligation on the debt, which I doubt the mortgage holder would go for.
John
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