Business Bad Debt from the Former S Crop

[IllinoisTaxMan]

The client dissolved S-corp in 2008 after selling the business assets by installment method. The client didn't receive any payments from the buyer in both 2008 and 2009. The note issued by the buyer became worthless in 2009. I am concerned where the client can claim the business bad debt on his tax return (1040). Any experienced advice would greatly appreciated.

[Maribeth]

The client dissolved S-corp in 2008 after selling the business assets by installment method. The client didn't receive any payments from the buyer in both 2008 and 2009. The note issued by the buyer became worthless in 2009. I am concerned where the client can claim the business bad debt on his tax return (1040). Any experienced advice would greatly appreciated.

What happened to the assets that your client sold? Was he able to repossess any of them?

Maribeth

[IllinoisTaxMan]

What happened to the assets that your client sold? Was he able to repossess any of them?

Maribeth

The client couldn't retrieve them. The buyer dissolved the business too. One of the buyers passed away. The other is broke after dissolved.

[OldJack]

Business bad debt is deducted on the same tax form where the income would have been recognized. Assume the note was from the corporation in the case of a S-corp that would be on 1040 Sch-E, page 2. If he sold his S-corp stock the note would be from the individual and a non-business bad debt reported on 1040 Sch-D.

[IllinoisTaxMan]

Thank you for your advice.

However, how do I report it on Sch E since the taxpayer can't receive K-1 any more from his dissolved company?

[cred65]

Would Form 4797 be appropriate?

[OldJack]

>>However, how do I report it on Sch E since the taxpayer can't receive K-1 any more from his dissolved company? <<

The same way you would report other expenses such as partner reimbursed expenses... on a line of Sch-E identified as a business bad debt. Form 4797 is for specific assets held as code sec. 1231 and higher code sections, the form itself is titled "Sales of Business Property". I don't think form 4797 is appropriate as the shareholder did not hold the note receivable as a business asset under code sec 1231 (business asset), rather he held it under code sec. 1221 (shareholder capital asset). A code sec. 1221 asset can be held for business and still not be used in a business with the disposition therefore being required to be reported on form 4797.

[IllinoisTaxMan]

Are you talking about reporting it on Sch E page 1 or Sch E page 2?

[OldJack]

Are you talking about reporting it on Sch E page 1 or Sch E page 2?

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