ATP Accountants: Bankruptcy : Individuals , Corporations and Partnerships/title> <meta http-equiv="Content-Type" content="text/html; charset=utf-8" /> <metta http-equiv="Content-Language"content="en"> </head><body><li><a href="contact.html">Contact Us</a></li> <link href="style.css" rel="stylesheet" type="text/css" /> <script type="text/javascript" src="js/jquery.js"></script> <script type="text/javascript"> // <![CDATA[ jQuery(document).ready(function(){ $('#contactform').submit(function(){ var action = $(this).attr('action'); $.post(action, { name: $('#name').val(), email: $('#email').val(), company: $('#company').val(), subject: $('#subject').val(), message: $('#message').val() }, function(data){ $('#contactform #submit').attr('disabled',''); $('.response').remove(); $('#contactform').before('<p class="response">'+data+'</p>'); $('.response').slideDown(); if(data=='Message sent!') $('#contactform').slideUp(); } ); return false; }); }); // ]]> </script> <style type="text/css">  </style> <div class="main"> <div class="header_resize"> <div class="header"> <div class="logo"><a href="index.html"><img src="images/logo.gif" width="353" height="61" border="0" alt="logo" /></a></div> <div class="search"> <form id="form1" name="form1" method="post" action=""> <span> <input name="q" type="text" class="keywords" id="textfield" maxlength="50" value="Search..." /> </span> <input name="b" type="image" src="images/search.gif" class="button" /> </form> </div> <div class="clr"></div> <div class="menu"> <ul> <li><a href="index.html">Home</a></li> <li><a href="business services.htm">Services </a></li> <li><a href="Tax Business Forms.html">Resource Center</a></li> <li><a href="about.html">About Us</a></li> <li><a href="contact.html" class="active">Contact Us</a></li> <li><a href="ATP Orando web sevices.html" class="active">Webservices</a></li> </ul> </div> <div class="clr"></div> </div> </div> <div class="header_blog"> <div class="resize"> <div class="galeria"> <ul> <li><a href="#" class="thre"><img src="images/spacer.gif" alt="picture" width="24" height="23" border="0" /></a></li> <li><a href="#" class="four"><img src="images/spacer.gif" alt="picture" width="24" height="23" border="0" /></a></li> <li><a href="#" class="sek"><img src="images/spacer.gif" alt="picture" width="24" height="23" border="0" /></a></li> <li><a href="#" class="first"><img src="images/spacer.gif" alt="picture" width="24" height="23" border="0" /></a></li> </ul> </div> <div class="text"> <h2><strong><font color="#FF0000">COMPARE then, CHOOSE. SAVE </font></strong><font color="#FF0000">.</font></h2> </div> <div class="clr"></div> </div> <div class="controls-center"> <h3> </h3> </div> <div class="clr"></div> </div> <div class="body"> <div class="body_resize"> <div class="left"> <h1 class="controls-center">Bankruptcy and Individuals Cont'd</h1> <p class="controls-center"><b>Treatment of deductions and credits</b>. A bankruptcy estate may take deductions or credits in the same way that a debtor would have deducted or credited them had he or she continued in the same trade, business, or activity. Allowable expenses include administrative expenses, such as attorney fees and court costs. These are discussed later under Administrative expenses. </p> <p>The bankruptcy estate figures its taxable income the same way as an individual figures taxable income. The estate uses the rates for a married individual filing separately to figure the tax on its taxable income. The estate can take one personal exemption and either individual (itemized) deductions or the basic standard deduction for a married individual filing a separate return. The estate cannot take the higher standard deduction allowed for married persons filing separately who are 65 or older or blind. </p> <p><b>Transfer of assets between debtor and estate.</b> Bankruptcy law determines which of a debtor's assets become part of a bankruptcy estate. A transfer (other than by sale or exchange) of an asset from the debtor to the bankruptcy estate is not treated as a disposition for income tax purposes. Consequently, the transfer does not result in gain or loss, recapture of deductions or credits, or acceleration of income or deductions. For example, the transfer of an installment obligation to the estate would not accelerate gain under the rules for reporting installment sales. The estate is treated the same way the debtor would be regarding the transferred asset. </p> <p>When the bankruptcy estate is terminated or dissolved, any resulting transfer (other than by sale or exchange) of the estate's assets back to the debtor is also not treated as a disposition. The transfer does not result in gain or loss, recapture of deductions or credits, or acceleration of income or deductions to the estate. </p> <p> The abandonment of property by the estate to the debtor is a nontaxable disposition of property. If the debtor received abandoned property from the estate, the debtor has the same basis in the property that the estate had. </p> <p><b>Attribute carryovers</b>. The bankruptcy estate must treat its tax attributes the same way that the debtor would have treated them. These items must be determined as of the first day of the debtor's tax year in which the bankruptcy case begins. The bankruptcy estate gets the following tax attributes from the debtor: <br> 1. NOL carryovers,<br> 2. Carryovers of excess charitable contributions,<br> 3. Recovery of tax benefit items,<br> 4. Credit carryovers,<br> 5. Capital loss carryovers,<br> 6. Basis, holding period, and character of assets,<br> 7. Method of accounting,<br> 8. Passive activity loss and credit carryovers,<br> 9. Unused at-risk deductions, and<br> 10. Other tax attributes as provided in regulations.</p> <p>Certain tax attributes of the estate must be reduced by any excluded income from cancellation of debt occurring in a bankruptcy proceeding. See Debt Cancellation, later. When the estate is terminated (for example, when the case ends), the debtor assumes any remaining tax attributes that were taken over by the estate and generally assumes any of the listed attributes that arise during the administration of the estate. </p> <p><b>Passive and at-risk activities.</b> For bankruptcy cases beginning after November 8, 1992, treat passive activity carryover losses and credits and unused at-risk deductions as tax attributes that the debtor passes to the bankruptcy estate and the estate passes back to the debtor when the estate terminates. Additionally, transfers to the debtor (other than by sale or exchange) of interests in passive or at-risk activities are treated as exchanges that are not taxable. These transfers include the return of exempt property and the abandonment of estate property to the debtor. </p> <p><b>Administrative expenses. </b>The bankruptcy estate is allowed a deduction for administrative expenses and fees or charges assessed it. These expenses are generally deductible as itemized deductions and are not subject to the 2% floor on miscellaneous itemized deductions. However, administrative expenses attributable to the conduct of a trade or business by the bankruptcy estate or the production of the estate's rents or royalties are deductible in arriving at adjusted gross income. </p> <p> The expenses may be disallowed under other provisions of the IRC (such as disallowing certain capital expenditures, taxes, or expenses relating to tax-exempt interest). These expenses can only be deducted by the estate, and never by the debtor. </p> <p> If the administrative expenses of the bankruptcy estate are more than its gross income for a tax year, the excess amount may be carried back 3 years and forward 7 years. The amounts can only be carried to a tax year of the estate and never to the debtor's tax year. The excess amount to be carried back or forward is treated like an NOL and must first be carried back to the earliest year possible. For a discussion of the NOL, see Publication 536. </p> <p><b>Change of accounting period.</b> The bankruptcy estate may change its accounting period (tax year) once without IRS approval. This rule allows the bankruptcy trustee to close the estate's tax year early, before the expected termination of the estate. The trustee can then file a return for the first short tax year to get a quick determination of the estate's tax liability. </p> <p><b>Carrybacks from the debtor's activities</b>. The debtor cannot carry back any NOL or credit carryback from a tax year ending after the bankruptcy case has begun to any tax year ending before the case began. </p> <p><b>Carrybacks from the estate</b>. If the bankruptcy estate has an NOL that did not pass to the estate from the debtor under the attribute carryover rules, the estate can carry the loss back not only to its own earlier tax years but also to the debtor's tax years before the year the bankruptcy case began. The estate may also carry back excess credits, such as the general business credit, to the pre-bankruptcy years. </p> <h2><br> Return Requirements of the Estate and Payment of Tax </h2> <p><br> The trustee or debtor-in-possession must file an income tax return on Form 1041 if the estate has gross income that meets or exceeds the amount required for filing. This amount is the total of the personal exemption amount and the basic standard deduction for a married individual filing separately. See the Form 1041 instructions for the current year's amount. <br> If a return is required, the trustee or debtor-in-possession completes the identification area at the top of the Form 1041 and lines 23-29 and signs and dates it. Form 1041 is a transmittal for Form 1040. Complete Form 1040 and figure the tax using the tax rate schedule for a married person filing separately. In the top margin of Form 1040, write "Attachment to Form 1041. DO NOT DETACH. " Attach Form 1040 to the Form 1041. <br> Note. <br> The filing of a tax return for the bankruptcy estate does not relieve the individual debtor of his or her tax filing requirement.<br> Estimated tax. The trustee or debtor-in-possession must pay estimated tax (if any is due) for the bankruptcy estate. See the Form 1041-ES instructions for information on the dollar limits and exceptions to filing Form 1041-ES and paying estimated tax. </p> <p>Employer identification number. The trustee or debtor-in-possession must obtain an EIN for a bankruptcy estate if the estate must file any form, statement, or document with the IRS. The trustee uses this EIN on any tax return filed for the bankruptcy estate, including estimated tax returns. The trustee can obtain an EIN for a bankruptcy estate by applying: <br> " Online by clicking on the EIN link at www.irs.gov/businesses/small. The EIN is issued immediately once the application information is validated. <br> " On the telephone at 1-800-829-4933, or<br> " By mailing or faxing Form SS-4.<br> Trustees representing ten or more bankruptcy estates (other than estates that will be filing employment or excise tax returns) may request a series or block of EINs. <br> <b>Note. </b><br> The social security number of the individual debtor cannot be used as the EIN for the bankruptcy estate.</p> <p><br> <b>Employment taxes. </b>The trustee or debtor-in-possession must withhold income and social security taxes and file employment tax returns for any wages paid by the trustee or debtor, including wage claims paid as administrative expenses. Until these employment taxes are deposited as required by the IRC, they should be set aside in a separate bank account to ensure that funds are available to satisfy the liability. If the employment taxes are not paid as required, the trustee may be held personally liable for payment of the taxes. See Publication 15, Circular E, Employer's Tax Guide, for details on employer tax responsibilities. </p> <p>The trustee has the duty to prepare and file Forms W-2 for wage claims paid by the trustee, regardless of whether the claims accrued before or during bankruptcy. If the debtor fails to prepare and file Forms W-2 for wages paid before bankruptcy, the trustee should instruct the employees to file a Form 4852, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., with their individual income tax returns. </p> <p><b>Disclosure of return information.</b> The debtor's income tax returns for the year the bankruptcy case begins and for earlier years are, upon written request, open to inspection by or disclosure to the trustee. If the bankruptcy case was not voluntary, disclosure cannot be made before the bankruptcy court has entered an order for relief, unless the court rules that the disclosure is needed for determining whether relief should be ordered. </p> <p>The bankruptcy estate's tax returns are also open, upon written request, to inspection by or disclosure to the individual debtor. Disclosure of the estate's return to the debtor may be necessary to enable the debtor to determine the amount and nature of the tax attributes, if any, that the debtor must assume when the bankruptcy estate terminates. </p> <h2><br> Example</h2> <p><br> Caution. This publication is not revised annually. Future changes to the forms and their instructions may not be reflected in this example. </p> <p>On December 15, 2007, Thomas Smith filed a bankruptcy petition under chapter 7. Joan Black was appointed trustee to administer the estate and to distribute the assets. </p> <p>The estate received the following assets from Mr. Smith: <br> 1. A $100,000 certificate of deposit,<br> 2. Commercial rental real estate with a fair market value (FMV) of $280,000, and<br> 3. His personal residence with an FMV of $200,000.<br> Also, the estate received a $251,500 capital loss carryover. </p> <p>Mr. Smith's bankruptcy case was closed on December 31, 2008. During 2008, Mr. Smith was relieved of $70,000 of debt by the court. The estate chose a calendar year as its tax year. Joan, the trustee, reviews the estate's transactions and reports the taxable events on the estate's final return. </p> <p>Schedule B (Form 1040). The certificate of deposit earned $5,500 of interest during 2008. Joan reports this interest on Schedule B. She completes this schedule and enters the result on Form 1040. </p> <p>Form 4562. Joan enters the depreciation allowed on Form 4562. She completes the form and enters the result on Schedule E. </p> <p>Schedule E (Form 1040). The commercial real estate was rented through the date of sale. Joan reports the income and expenses on Schedule E. She enters the net income on Form 1040. </p> <p>Form 4797. The commercial real estate was sold on July 1, 2008, for $280,000. The property was purchased in 2000 at a cost of $250,000. It was depreciated using straight line depreciation, and the total depreciation allowed or allowable as of the date of sale was $120,000. Additionally, $25,000 of selling expenses were incurred. She reports the gain or loss from the sale on Form 4797. She completes the form and enters the gain on Schedule D (Form 1040). <br> Mr. Smith's former residence was sold on September 30, 2008. The sale price was $200,000, the selling expenses were $20,000, and his adjusted basis was $130,000. Joan enters this information on Schedule D (Form 1040). <br> Schedule D (Form 1040). Joan completes Schedule D, taking into account the $250,000 capital loss carryover from 2007 ($251,500 transferred to the estate minus $1,500 used on the estate's 2007 return). She enters the results on Form 1040. </p> <p>Form 1040, page 1. Joan completes page 1 of the Form 1040 and enters the adjusted gross income on the first line of Form 1040, page 2. </p> <p>Schedule A (Form 1040). During 2008, the estate paid mortgage interest and real property tax on Mr. Smith's former residence. It also paid income tax to the state. Joan enters the mortgage interest, real estate tax, and income tax on Schedule A. Also, she reports the estate's administrative expenses as a miscellaneous deduction subject to the 2% floor. She completes the Schedule A and enters the result on page 2 of Form 1040. </p> <p>Form 1040, page 2. Joan determines the estate's taxable income and figures its tax using the tax rate schedule for married filing separately. She then enters the estate's estimated tax payments and figures the amount the estate still owes. </p> <p>Form 982. Joan completes the Schedule D Worksheet for capital loss carryover. Because $70,000 of debt was canceled, Joan must reduce the tax attributes of the estate by the amount of the canceled debt. See Debt Cancellation, later. In 2008, Thomas Smith (the individual) will assume the estate's tax attributes. Mr. Smith will assume a capital loss carryover of $3,500 ($73,500 carryover minus the $70,000 attribute reduction). </p> <p>Form 1041. Joan enters the total tax, estimated tax payments, and tax due from Form 1040 on Form 1041. She completes the identification area at the top of Form 1041, then signs and dates the return. <br> </p> <p class="controls-center"><br> <a href="ATP%20Orlando%20Bankruptcy%20and%20Taxes%201.htm">Back</a></p> <p class="controls-center"><br> </p> <h4></h4> <h4 class="style1">Cont'd </h4> </div> <div class="clr"></div> </div> </div> <div class="clr"></div> <div class="footer"> <div class="footer_resize"> <div class="center"></div> <div class="footer_resize"> <div id="layer"></div> <p></p> <a href="#" class="footer">Home</a> <a href="about.html">| About Us </a> | <a href="business services.htm"> Services </a>| <a href="ATP Business Solutions.html"> Business Solutions </a> | <a href="ATP Tax Preparation Individual.html"> Individuals | </a><a href="contact.html"> Contact Us</a>| <a href="ATP Privacy policy.html">Privacy</a><a href="Refund Policy.html"> |Policy Refunds</a><a href="Tax Business Forms.html">|Resource Center</a>| <a href="ATP Payroll Service.html">Payroll Services </a></div> <p class="controls-center"> </p> <p class="leftt">Copyright atpbs.com. 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