Academic journal article Journal of Accountancy

Regs Finalized on S Corp COD Exclusion

Academic journal article Journal of Accountancy

Regs Finalized on S Corp COD Exclusion

Article excerpt

The IRS and Treasury Department issued final regulations (TD 9469) governing how an S corporation reduces its tax attributes under IRC [section] 108(b) when the S corporation has cancellation of debt (COD) income (also called discharge of indebtedness income) that is excluded from gross income under section 108(a).

The regulations address situations in which the aggregate amount of the shareholders' disallowed section 1366(d) losses and deductions that are treated as a net operating loss (NOL) tax attribute of the S corporation exceeds its excluded COD income. The final regulations generally adopt the provisions of proposed regulations that were issued in 2008 (REG-102822-08).

Under section 108(b), taxpayers who are bankrupt or insolvent or whose discharged debt is qualified farm, real property business or principal residence indebtedness may exclude it from gross income. However, they must reduce certain tax attributes in the order given in section 108(b)(2), starting with any NOL and NOL carryover for the tax year of the discharge (unless they elect to first reduce their basis of depreciable property).

For an S corporation, these reductions are made at the corporate level after its items of income, loss, deduction and credit for the tax year of the discharge pass through to its shareholders under section 1366(a). …

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