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

Note: CLE credit is not offered on this program

Recording of a 110-minute CPE webinar with Q&A

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Conducted on Thursday, March 9, 2023

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Course Materials

This webinar will cover the critical considerations of individual taxpayers, shareholders in S corporations, and LLC members who are considering filing for bankruptcy. Our bankruptcy experts will analyze the tax ramifications of bankruptcy, including COD income and exclusions, the reduction and ordering of tax attributes, how the type of bankruptcy affects the tax consequences, and personal tax liability concerns for owners of flow-through entities that file for bankruptcy.

Description

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.

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Outline

  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

Benefits

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

Faculty

Boffill-Kermith
Kermith Boffill, CPA
Partner
Grobstein Teeple

Mr. Boffill's area of practice is tax compliance. He is experienced with providing tax advisory services related to...  |  Read More

DeGraw, Kenneth
Kenneth J. DeGraw, CPA, CFE, CFP
Partner
Withum Smith+Brown

Mr. DeGraw has more than 35 years of experience in public accounting and includes working with business entities and...  |  Read More

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