Defaulted SBA EIDL Loans, Limited Liability Company (LLC) and Cancellation of Debt Income (COD) under Section 108 of the Internal Revenue Code

 Defaulted SBA EIDL Loans, Limited Liability Company (LLC) and Cancellation of Debt Income (COD) under Section 108 of the Internal Revenue CodeAs many readers of our emails and blog posts know, Shenwick & Associates  has developed a specialty helping borrowers, who have defaulted on SBA EDIL loans. Jim Shenwick, Esq  has an LLM in taxation from NYU Law School and is familiar with many tax issues involving SBA loan defaults.Provided at the end of this email are links to many articles he has  written about defaulted SBA EIDL loans.There are actually two issues involved in Limited Liability Company SBA EIDL loan defaults, the first one involves  a workout with the SBA to cure the loan default (or a bankruptcy filing by the LLC)  and the second which gets much less focus and attention are the tax consequences to the borrower  or members of the LLC, when an SBA loan  goes into default.An LLC  is a pass-through entity for tax purposes, which means no taxes are paid by the LLC, they are paid by the members who own the LLC.Section 108 of the Internal Revenue Code pertains to income from the discharge (non payment) of indebtedness and is also known as cancellation of debt income (COD).  Section 108 provides that if an individual or a business borrows money and the loan is not repaid, the individual or business  are enriched by the amount of the non-payment. The amount of no-payment is deemed ordinary income for tax purposes.As an example, assume an LLC borrows $100,000 from a bank and does not repay the loan. The bank sends the IRS and LLC a Form 1099-C, reporting $100,000 of ordinary income. Since the LLC is a pass through entity, that $100,000 of ordinary income is reported by the LLC members (owners of the LLC).If those members are in a  24% tax bracket, they would have to pay $24,000 in federal income tax on income from discharge of indebtedness.If the member or owner of the LLC does not report that income on their tax return and pays tax on that income, the IRS will audit them. It will then assess penalties and interest on the unpaid taxes.Many clients, accountants and lawyers are unaware of this issue or do not focus on the income from indebtedness issue (COD), regarding SBA EIDL loan defaults. WHAT CAN BE DONE TO AVOID INCOME FROM DISCHARGE OF INDEBTEDNESS?Section 108 of the IRC provides two exceptions to COD income.The first is that  if the LLC or a member files for Bankruptcy (IRC 108(a)(1)(A)) then no COD income is reportable or payable.  The second is the Insolvency Exception (IRC 108(a)(3)). Insolvency means that the taxpayer's liabilities are greater than their assets.  Individuals using the  Insolvency Exception need to attach Form 982 to their  federal income tax return.This email provides a brief  overview of EIDL loan default tax issues. Clients are advised to consult with a specialist in this area of law and a tax adviser. Jim Shenwick, Esq. is available to speak with client’s or their advisors.
Jim Shenwick, Esq  917 363 3391  [email protected] Please click the link to schedule a telephone call with me.https://calendly.com/james-shenwick/15minWe held individuals & businesses with too much debt!
--------------Jim Shenwick, Esq/Shenwick & Associates Blog Posts on SBA EIDL LoansOffers In Compromise ("OIC") for Defaulted SBA EIDL loans and Section 108 of the Internal Revenue Code ("IRC"), Relief of Indebted Income, a Trap for the Unwary!https://shenwick.blogspot.com/2023/05/offers-in-compromise-oic-for-defaulted.html
EIDL LOAN WORKOUTS AND BANKRUPTCY    https://shenwick.blogspot.com/2022/07/eidl-loan-workouts-and-bankruptcy.html
EIDL Loan Default Questions & Answers https://shenwick.blogspot.com/2022/10/eidl-loan-default-questions-answers.html
EIDL LOAN DEFAULT DOCUMENT REVIEW, WORKOUT, BANKRUPTCY FILING & OFFER IN COMPROMISEhttps://shenwick.blogspot.com/2022/07/eidl-loan-default-document-review.html
EIDL Defaulted Loanshttps://shenwick.blogspot.com/2022/07/eidl-defaulted-loans.html
New Relief Program for SBA EIDL Borrowers Who are Having Difficulty Repaying EIDL Loans " Hardship Accommodation Plan"https://shenwick.blogspot.com/2023/05/new-relief-program-for-sba-eidl.html
EIDL LOANS and SBA OFFER IN COMPROMISE PROGRAMhttps://shenwick.blogspot.com/2022/07/eidl-loans-and-sba-offer-in-compromise.html