Discussion:S-Corp to C-Corp and Reduced Basis Debt
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Discussion Forum Index --> Advanced Tax Questions --> S-Corp to C-Corp and Reduced Basis Debt
Discussion Forum Index --> Tax Questions --> S-Corp to C-Corp and Reduced Basis Debt
| 13 December 2007 | |
| Client currently an S with reduced basis shareholder debt. S status will be revoked upon upcoming issuance of second class of stock. Any tax consequence from having reduced basis debt at revocation? What I have found says the debt just becomes reduced basis debt on the books of the C corp. What consequence upon eventual repayment of the debt? Same as if held by an S? How do I report the eventual debt repayment (on an S corp it goes on the K-1, but can't do that with a C). Can't find any research addressing a C corp with reduced basis debt carried over from when an S corp. | |
| December 13, 2007 | |
| Can't answer that since my job is to exterminate C corps. But, and in that vein, have you considered issuing non-voting shares rather than a second class? That is legal in the S now. | |
| 13 December 2007 | |
| The stock issue has to do with raising cash and giving the new shareholders preferential terms on repayment of loans. | |
| 13 December 2007 | |
| I don't think the repayment of the debt will be treated any differently because of the revocation. It will continue to be ordinary or capital gain depending on the existence of a written debt instrument. The big difference is that because the entity is now a C-corp, the income of the corporation will no longer restore the debt basis, so the there is really no way to avoid recognizing the income upon repayment now. I would report the ordinary gain on line 21 of the 1040 as non-SE income. If its capital I would put it on sch. D. I, like you, couldn't find anything definitive, but this seems like a reasonable position to me. | |
| 13 December 2007 | |
| Thanks for your posts JR1 and GregC8579, I appreciate your time | |
| 13 December 2007 | |
| DM@BG, out of curiousity, how do you report the gain on reduced basis debt repayment on the K-1? I have always considered that a shareholder-level calculation, not pass-through gain. What is your view, or anyone else's for that matter? JR1? | |
| December 13, 2007 | |
| Never done it, but always understood it to be a Sch. D item on the 1040 only. | |
| 13 December 2007 | |
| According to what I was reading, the debt repayment (not the gain) gets reported on Schedule K (and K-1), line 16e (Items affecting shareholder basis, repayment of loans from shareholders).
This would at least provide some information to the preparer of the 1040, vs. the information possibly getting lost/overlooked/not reported if debt repayment occurs while a C corp. | |
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