Bankruptcy and Taxes

[HodgePA]

What is the name of your state? Pennsylvania

Considering bankruptcy for S Corp. Back taxes are owed.

Do I need a lawyer?
What is the process, in a nutshell?
What is the liability (to owners) to pay back taxes?

Thank you

 

[Taxing Matters]

What is the name of your state? Pennsylvania

Considering bankruptcy for S Corp. Back taxes are owed.

Do I need a lawyer?
What is the process, in a nutshell?
What is the liability (to owners) to pay back taxes?

Thank you

How is the entity organized under state law — LLC, LLP, corporation? (S-corporation is a tax election, not a type of business entity.) How many owners does it have? And what kind of bankruptcy do you have in mind, reorganization (chapter 11) or liquidation (chapter 7)? What kinds of debts does the entity owe? And since you mention taxes, exactly what kind of taxes? S-corporations do not generally pay any income tax unless they had a prior history of being a C-corporation. There some tax liabilities for which owners or officers of the business may be personally liable regardless of whether the entity files bankruptcy.

Very generally for a limited liability entity all a Chapter 7 liquidation does is provide an orderly process to shutting down the business. There is no discharge granted to limited liability entities in Chapter 7. For that reason many corporations that close down simply liquidate and close without going through bankruptcy. If done properly they get pretty much the same result as going through bankruptcy.

But whether doing a self-managed liquidation or some kind of bankruptcy, consulting a bankruptcy lawyer is a good idea. Either way. there are rules about what you need to do, and if you screw it up you can cause yourself problems

 

[LdiJ]

How is the entity organized under state law — LLC, LLP, corporation? (S-corporation is a tax election, not a type of business entity.) How many owners does it have? And what kind of bankruptcy do you have in mind, reorganization (chapter 11) or liquidation (chapter 7)? What kinds of debts does the entity owe? And since you mention taxes, exactly what kind of taxes? S-corporations do not generally pay any income tax unless they had a prior history of being a C-corporation. There some tax liabilities for which owners or officers of the business may be personally liable regardless of whether the entity files bankruptcy.

Very generally for a limited liability entity all a Chapter 7 liquidation does is provide an orderly process to shutting down the business. There is no discharge granted to limited liability entities in Chapter 7. For that reason many corporations that close down simply liquidate and close without going through bankruptcy. If done properly they get pretty much the same result as going through bankruptcy.

But whether doing a self-managed liquidation or some kind of bankruptcy, consulting a bankruptcy lawyer is a good idea. Either way. there are rules about what you need to do, and if you screw it up you can cause yourself problems

There is a very real possibility that they are talking about payroll taxes.

 

[Taxing Matters]

There is a very real possibility that they are talking about payroll taxes.

It is, but that's not the only possibility. And it makes a significant difference what exact taxes are owed, which is why I asked the OP what kind of taxes the entity owes.

 

[despritfreya]

Considering bankruptcy for S Corp.

If this entity is reorganizing it would be filing a Chapter 11. If it is shutting down there are very few reasons such an entity would file a Chapter 7. Chapter 7 is typically not done for entities unless there is a specific reason to file.

Do I need a lawyer?

Entities MUST be represented by an attorney.

What is the process, in a nutshell?

There is no "nutshell" when dealing with an entity. The entity, through its principal(s), needs to consult with a qualified attny. Chapter 11 is very complicated and expensive even, I suspect, with the new small business case provisions that will take effect in February, 2020. Chapter 7 is potentially a ticking time-bomb if the entity did not maintain proper books and records and/or the principal(s) used it as a personal piggy-bank.

What is the liability (to owners) to pay back taxes?

Depends upon what type of tax.

Best "Internet advice" - consult with an attny.

Des.

 

[HodgePA]

Clarification: The "taxes owed" are penalties and interest on those penalties (taxes were paid) on the late filing of 1120S forms to the IRS.

I spoke with a tax lawyer who said that since these are penalties, I could shut the business down. Since the business has no assets (no property or money) - it's a service-based company by closing the business and filing on this year's forms that the business is now closed, the penalties cannot be paid.

Looking for a second opinion on this option instead of declaring bankruptcy which is less desirable and will not absolve the penalties.

 

[LdiJ]

Clarification: The "taxes owed" are penalties and interest on those penalties (taxes were paid) on the late filing of 1120S forms to the IRS.

I spoke with a tax lawyer who said that since these are penalties, I could shut the business down. Since the business has no assets (no property or money) - it's a service-based company by closing the business and filing on this year's forms that the business is now closed, the penalties cannot be paid.

Looking for a second opinion on this option instead of declaring bankruptcy which is less desirable and will not absolve the penalties.

How much money is actually involved?

 

[despritfreya]

Based upon OP's last post I see no reason for this entity to do a bankruptcy. It is not reorganizing and so long as OP does not try to establish a new business doing exactly the same as the old business, the entity appears to be dead. Who cares if someone sues a dead person?

Lastly, Federal Corporate Income Taxes do not flow to the principals so it does not appear that OP is on the hook for that. OP is on the hook for anything OP personally guaranteed and, if there is a lot of such debt, OP may need a personal bk.

Des.

 

[LdiJ]

Based upon OP's last post I see no reason for this entity to do a bankruptcy. It is not reorganizing and so long as OP does not try to establish a new business doing exactly the same as the old business, the entity appears to be dead. Who cares if someone sues a dead person?

Lastly, Federal Corporate Income Taxes do not flow to the principals so it does not appear that OP is on the hook for that. OP is on the hook for anything OP personally guaranteed and, if there is a lot of such debt, OP may need a personal bk.

Des.

Its an S-corp so the income and therefore the income taxes DO flow through to the shareholders on a Schedule K1. The money owed is the monthly $195.00 x the number of shareholders for however many months the S-corp returns were delayed. So, if the S-corp had three shareholders (or members if its an LLC that made an S-corp election) then the monthly penalty would be $585.00 x however many months the returns were delayed. That can add up pretty fast, particularly if they didn't file for a few years.

Hodge, was this a one time thing? Did you not file for a year or two and then got it all caught up with at once? If so, you can ask the IRS to abate the penalties. They may or may not do so, but they often will do so if its a "first time" thing and you haven't let too much time pass since they assessed the penalties.

 

[HodgePA]

Long story short: The taxes were not filed for a period of 5 years: 2008, 2009, 2010, 2011, 2012. IRS was missing 2008's return. Fast forward to 2015, the return was filed and the IRS abated the penalty for that year (2008), but said we are on the hook for the remaining 4 years for ~$19,000. IRS said they would not abate the remaining 4 years. Business does not have the cash to pay the penalties.

Tax lawyer concurred that bankruptcy is not a good option because it doesn't remedy the tax penalties. BTW, I spoke briefly with the lawyer over the phone and he is not representing me, just giving me advice and willing to help further if needed.

 

[despritfreya]

Its an S-corp so the income and therefore the income taxes DO flow through to the shareholders on a Schedule K1.

Are you indicating the SubS corps do not pay income tax at all? Not an accountant so not sure but, if so, then line 25 of Form 1120S makes no sense and neither do the instructions that go along with the form as it relates to line 25:

"Instructions for Form 1120S. . . Line 25. Amount Owed. If the corporation can't pay the full amount of tax owed, it can apply for an installment agreement online. The corporation can apply for an installment agreement online if: It can't pay the full amount shown on line 25, The total amount owed is $25,000 or less, and The corporation can pay the liability in full in 24 months. . ..

Please clarify/educate.

Des.

 

[LdiJ]

Are you indicating the SubS corps do not pay income tax at all? Not an accountant so not sure but, if so, then line 25 of Form 1120S makes no sense and neither do the instructions that go along with the form as it relates to line 25:



Please clarify/educate.

Des.

Tax returns for an S-corp are information returns. S-corps do not pay any income tax on their profits. The profits are all passed through to the shareholders on a Schedule K-1, and the shareholders pay income tax at their individual tax rates. That was why S-corps were created in the first place. This also avoids double taxation. Line 25 (in fact that whole section) refers to odd issues where there would be a significant exception to the normal rules. Look at line 22 and its instructions to determine what kinds of income might require the S-corp to pay some income tax. It will be a rare occurrence. Most situations involving any kind of income tax for the S-corp are due to the corporation converting from a C-corp to an S-corp.

Partnerships work in the same way...the income is passed through to the partners and the partnership pays no income tax.

 

[despritfreya]

Tax returns for an S-corp are information returns. S-corps do not pay any income tax on their profits. The profits are all passed through to the shareholders on a Schedule K-1, and the shareholders pay income tax at their individual tax rates. That was why S-corps were created in the first place. This also avoids double taxation. Line 25 (in fact that whole section) refers to odd issues where there would be a significant exception to the normal rules. Look at line 22 and its instructions to determine what kinds of income might require the S-corp to pay some income tax. It will be a rare occurrence. Most situations involving any kind of income tax for the S-corp are due to the corporation converting from a C-corp to an S-corp.

I see. . . so on a rare instance the corp may have a tax debt, otherwise, if a S there is no income tax burden. As a result, in OP's case, OP is really talking about income tax as owed on his/her personal 1040.

Edt to add. . . I should not assume that the taxes are reported as owed on OP's 1040 as it is possible that one of those rare instances applied.

Des.

 

[Taxing Matters]

Clarification: The "taxes owed" are penalties and interest on those penalties (taxes were paid) on the late filing of 1120S forms to the IRS.

The penalty for late filing of the Form 1120-S and the interest on the penalty are owed only by the corporation; the penalty is not owed personally by the shareholders of the corporation. However, if the corporation liquidates and distributes assets to the shareholders without paying the penalty the IRS may pursue transferee assessments against the shareholders who got those distributions.

I spoke with a tax lawyer who said that since these are penalties, I could shut the business down. Since the business has no assets (no property or money) - it's a service-based company by closing the business and filing on this year's forms that the business is now closed, the penalties cannot be paid.

I agree. If the business truly has no assets then just close it down following the procedure in the law for the state where the entity was organized and file the final returns for the entity and you are done. At least as far as the 1120-S penalty is concerned.

 

[Taxing Matters]

Its an S-corp so the income and therefore the income taxes DO flow through to the shareholders on a Schedule K1. The money owed is the monthly $195.00 x the number of shareholders for however many months the S-corp returns were delayed.

The income and expenses of the S-corporation flows through to the shareholders to be reported on their personal returns. But other taxes and penalties assessed against the corporation, like the late filing penalty for the Form 1120-S, do not flow through to the shareholders. They are obligations of the S-corporation itself.

Partnerships work in the same way...the income is passed through to the partners and the partnership pays no income tax.

But in a true general partnership the partners are fully liable for all obligations of the partnership, unlike a corporation or LLC.