Tax Consequences of Bankruptcy: COD Income, Reduction of Tax Attributes, and Personal Tax Liability for Pass-Through Entities

COVID and the national pandemic have forced many individuals and companies to file for bankruptcy or to consider filing. Advanced planning for bankruptcy can maximize the use of tax attributes, related tax benefits of bankruptcy, debt modifications, and workout agreements. Foremost, cancellation of debt income (COD) is generally taxable. Tax favored exclusions do exist that can eliminate or minimize this taxable income. Insolvency (under Section 108) and bankruptcy are two exceptions to the inclusion of COD income; however, the implications of the exclusion can vary depending on the type of debtor. Careful consideration must be given to the reduction of Tax Attributes Due to Discharge of Indebtedness. Debtors not in a Title 11 matter will need to carefully consider the calculation of solvency, which has implications beyond the exclusion of COD.

Individuals who own interests in flow-through entities must consider whether bankruptcy of the pass-through entity could result in a personal tax liability. Insolvency of an S corporation is determined at the corporate level, while partnership insolvency is generally determined at the partner level. Workouts structured as a sale or exchange are not eligible for exclusion of COD income.

Tax practitioners working with struggling individual taxpayers and individuals who are S corporation or partnership owners need to understand how to properly advise these taxpayers on the personal tax consequences of the entity’s filing for bankruptcy and the potential need for a personal filing as a result.

Listen as our panel of bankruptcy taxation experts addresses front-end bankruptcy planning to minimize tax consequences.

1. Tax considerations of bankruptcy: introduction
2. Types of bankruptcy
3. Cancellation of debt (COD) income
4. Personal liability of owners of flow-through entities
5. Tax attributes
   1. Reduction in bankruptcy
   2. Form 982
6. IRS debt
7. Other considerations

The panel will cover these and other critical issues:

• Types of bankruptcy and the relative tax implications of each
• When members should be concerned about personal tax liability for an insolvent LLC or partnership
• How S corporation bankruptcy differs from partnership bankruptcy
• Recognizing and avoiding COD income in bankruptcy

Learning Objectives

After completing this course, you will be able to:

• Identify common bankruptcy types
• Determine specific exceptions to recognizing COD income
• Decide when IRS debt could be eliminated in bankruptcy
• Ascertain differences between partnership and S corporation bankruptcy filings

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience preparing complex tax forms and schedules, supervising other preparers or accountants. Specific knowledge and understanding of individual income taxation, including itemized deductions, individual income tax credits, net operating loss limitations including carrybacks and carryforwards.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).