Hi, Go to your profile and share some info. Who are you?? Where are you??
Everybody in business should have an accountant.
You have two choices, you pay your accountant NOW, or you pay the IRS MORE LATER.
It sounds like you need the accountant.now.
A loan shouldn't be reflected on your Income Statement, Loans should only affect balance sheet accounts. If this loan is adding to your loss then you are not following proper accounting standards.
As for the gas and phone bills, not much you can do about that. In certain circumstances, depending on the nature of your business, these costs may be able to be capitilized rather than expensed, if they were incurred during the formation of the business. That's something you can look into.
You could also consider forgiving the debt, very often forgiven debt is classified by the IRS as income and as such could offset your losses. Not sure how this would affect your personal income taxes though.
Interesting. any idea how can I forgive the debt? should I write it as a deposit from owner?
Let's say if I'm preparing my 1120 - where would I indicate that I forgive the debt?
Your help is much appreciated.
The accounting treatment should be as follows;
Credit: Extraordinary Gain
I'm much less versed in taxes than I am in financial accounting but I would imagine that this gain would be applied to line 10 (other income) of form 1120. I would run this by a tax accountant.
Hope this helps.
Strictly speaking, debt forgiveness will be a taxable income item to your corporation. However, I don't think "debt forgiveness" is an accurate description of what you actually have in mind here.
Rather, it's probably your intent to simply reclassify your advances to the company from the status of "loans to be repaid soon" to the status of "capital contributions from owner to corporation".
Just debit the Loans to Shareholder account, and credit some Equity account (such as Additional Paid In Capital). This entry would reflect the intention that, with hindsight, you realize that your advances were really more in the nature of owner contributions to the company's capital, rather than bona fide loans.
Yes, but how would this solve his orignal problem of offsetting his losses?
That's a very good point, and the reclassification I suggested would have no effect on the corporation's PnL. I was responding to what appeared at first to me to be a digression from Micro's original question, to a separate question of how best to remove the liability from the bal sheet. I intended, but forgot, to mention in conclusion that the original objective would still be unaddressed.
On a second reading of your suggestion (Yep, I should-a read more carefully the first time---my bad!) I see that your strategy was to have the COD income offset the losses and thereby restore the PnL to at least a breakeven situation. Neat idea! But it does lead me to a couple of questions...
- There's a tax cost involved, as those expenses would've otherwise created an NOL which has a positive value, if there's any reasonable expectation of future profits. Only Micro could say if the benefits outweigh this cost, depending on the specifics involved.
- Since a corp and it sole shareholder represent something of a right pocket / left pocket situation (esp to a banker who'll certainly require Micro's PG on any corporate debt), then the corp's COD income will be mirrored by a bad debt expense of Micro, personally. Surely to a lender who looks at Micro and the corp as more or less a single economic unit for lending purposes, the bad debt writeoff and the COD merely wash?
I like your eliminate-the-expenses strategy, and I'm hoping some flaws can be found in these two concerns. Cheers!
I agree on both points. Its up to you now Micro!
OK, I went to a CPA, the easiest way to make this loss disappear is to dissolve the company. that will zero the loss.
There's no other good way to "forgive the loss" or do anything like that.
And also, he told me that with a C Corporation there's no way for me to reduce my taxes on my personal return... so that strange rule by Fannie Mae remains a mystery to me - why would they reduce the loss from my income when doing a personal loan...
Those are two unrelated things. A lender is concerned solely with the likelihood of your making all the payments on time, and so will consider all of your cash inflows and outflows, in whatever form. If you're paying the bills for some company, that certainly impacts your economic wherewithall to service a debt.
Tax law, on the other hand, has a totally unrelated purpose, which is to define the rules by which a number called "taxable income" is calculated. Included in those rules is one which says that C-corp losses are on the "can't deduct" list. Similarly, you can't deduct your personal living expenses on your tax return, but a lender will consider these expenditures in evaluating your debt-servicing capability.
On the flip side of the same coin, if you had non-taxable income (such as muni interest) that income would be taken into account, in your favor, by a prospective lender, even though that same income is ignored by the IRS for tax return purposes. Apples and oranges.
I have a C Corporation that I own (I'm the only owner / president)
It had no income this year and last year, the tax retun shows a loss of about 13,000
I guess every time I do add a "loan by owner" and pay gas and phone bills it increases the loss.
I need to file another tax return now,
Is there a way for me to reduce or eliminate the loss ?
I would appreciate any suggestion / direction
The reason I want to do that : I never tried to claim this loss or use it in my personal tax return, but when trying to get a Fannie Mae, they deduct the C corp loss from my personal income (this is the lenders policy since I'm the only owner of the C corp - even though it doesn't make too much sense to me)
Thanks in advance.