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    bclegg's Avatar
    bclegg Posts: 1, Reputation: 1
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    #1

    Feb 26, 2010, 10:05 AM
    What happens to debt on the books when you close an s corporation?
    I have to close S Corporation which has a line of credit with a very large balance. The loan was extended be two of the corporations hareholders. The corporation is not expected to pay back the debt. How is this debt to be treated upon closure? What are the tax implications on the final return?
    morgaine300's Avatar
    morgaine300 Posts: 6,561, Reputation: 276
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    #2

    Feb 27, 2010, 11:44 PM

    Had to think on this a bit. I've had to close out S corps before but it's been a long time. Logically it seems to be me it would just be the opposite of accepting someone new into the company and bringing a debt with them. You're working with net values.

    Just as an example, let's say you've sold off everything and have $20,000 in cash and $2,000 in debt. You have 3 partners with capital of 8,000 for A, 6,000 for B & 4,000 for C. A & C are the ones who have to pay off the loan. The net value of the company (and therefore owners) is 18,000

    So B pulls out and gets 6,000 in cash, which debits B's capital and credits the cash. After this transaction, there's 14,000 of cash, and 12,000 net value.

    Then we pull A out. His share is 8,000. If he is going to pay 1,000 of the debit, he gets 9,000 of cash. The net of what he is taking with him is still the 8,000. Debit A's capital 8,000, debit the liability 1,000, and credit cash 9,000. After this transaction, there is 5,000 of cash left and 4,000 net value.

    Then lastly we pull C out. His share is 4,000, which is debited, and debit the other 1,000 of debt, and credit 5,000 cash. And everything is off the books.

    When someone joins in, they can contribute cash and bring a debt with them that the company takes over. Their capital is the net of these. This is like the opposite of that.

    I really see no tax implications to the company itself since S corps don't pay tax (usually). From the point of view of the two people taking the debt, they have to look at what net value they got from the company, which was their current capital balance. Though I am not a tax expert and you may want to check on the tax forum whether there's anything "special" about such a transaction in terms of taxes.
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