Q: S-Corp Tax question: On form 1120-S Schedule B line 12, regarding non shareholder debt cancellation, who's debt is it?
Form 1120-S, Schedule B, Other Information, Line 12: The question is: During the tax year, did the corporation have any non-shareholder debt that was canceled, was forgiven, or have the terms modified so as to reduce the principal amount of the debt?
Is the question referring to a debt a non-shareholder owes to the corporation, which the corporation forgave, or a debt the corporation owes to the non-shareholder, which the non-shareholder forgave?
The only instructions that are given by the IRS for this question are: " Amounts related to the forgiveness of PPP loans are disregarded for purposes of this question."
Further, if the shareholders of the S-corporation forgave a debt as a gift to a non-shareholder how would it be reported on Form 1120-S? (I think each shareholder would have to file a form 709 gift tax return if it exceeded the limit, however I'm not sure how it would be reported on 1120-S.)
A:
Line 12 on Schedule B of Form 1120-S is referring to a debt that the S corporation owed to a non-shareholder, and that debt was either canceled, forgiven, or had its terms modified to reduce the principal amount.
Here's a more detailed explanation:
1. The debt in question is a debt that the S corporation owed to a non-shareholder (i.e., a third party).
2. If this debt was canceled, forgiven, or had its terms modified to reduce the principal amount, the S corporation should answer "Yes" to the question on line 12.
3. The forgiveness of this debt by the non-shareholder may result in cancellation of debt (COD) income for the S corporation, which would then be passed through to the shareholders based on their ownership percentages.
Regarding your second question, if the shareholders of the S corporation forgave a debt as a gift to a non-shareholder, it would not be reported on Form 1120-S. Instead:
1. Each shareholder would need to file a Form 709 (gift tax return) if the gift exceeded the annual gift tax exclusion amount ($18,000 for 2024).
2. The forgiveness of the debt would be treated as a distribution from the S corporation to the shareholders, followed by a gift from the shareholders to the non-shareholder.
3. The distribution to the shareholders would be reported on their respective Schedule K-1s (Form 1120-S) based on their ownership percentages.
It's important to consult with a tax professional for specific guidance on your situation, as the tax treatment of debt forgiveness can be complex and may vary depending on the circumstances.
Justia Ask a Lawyer is a forum for consumers to get answers to basic legal questions. Any information sent through Justia Ask a Lawyer is not secure and is done so on a non-confidential basis only.
The use of this website to ask questions or receive answers does not create an attorney–client relationship between you and Justia, or between you and any attorney who receives your information or responds to your questions, nor is it intended to create such a relationship. Additionally, no responses on this forum constitute legal advice, which must be tailored to the specific circumstances of each case. You should not act upon information provided in Justia Ask a Lawyer without seeking professional counsel from an attorney admitted or authorized to practice in your jurisdiction. Justia assumes no responsibility to any person who relies on information contained on or received through this site and disclaims all liability in respect to such information.
Justia cannot guarantee that the information on this website (including any legal information provided by an attorney through this service) is accurate, complete, or up-to-date. While we intend to make every attempt to keep the information on this site current, the owners of and contributors to this site make no claims, promises or guarantees about the accuracy, completeness or adequacy of the information contained in or linked to from this site.
