Question: What are the Tax Implications of Business Bankruptcy
What happens to taxes in a business bankruptcy? This article looks at the two main types of business bankruptcy (Chapter 11 Reorganization and Chapter 7 Liquidation) and discusses the tax implications for different types of legal types.
Answer:
Bankruptcy and Taxes
The tax implications for bankruptcy depend on both the type of bankruptcy and the type of business entity.
Here is some information to help you determine tax obligations in bankruptcy.
Taxes Before Filing Bankruptcy
Before filing bankruptcy, the petitioner (the business) must prove that it filed the last 4 years of tax returns. It must submit a copy of the most recent return to the bankruptcy court and to any creditors who request a copy.
Partnerships and Corporations
The filing requirements for a business do not change during the bankruptcy process. When a partnership or corporation is in the bankruptcy process, the court-appointed trustee is responsible for filing the regular income tax returns for the business on the appropriate forms. However, the trustee may apply for an exemption from filing taxes for a corporation. To qualify, the corporation must have ceased business operations and must have neither assets nor income for the tax year.
Debt Cancellation and Taxes
In general, if a debt is canceled in bankruptcy, it is subject to taxation. A partnership's debt that is canceled because of bankruptcy is not included in the partnership's income.
It may or may not be included in the individual partners' income.
Priority Claim of Taxes Due
Tax debts, along with other debt claims of the business, are paid according to an assigned priority.
What happens to taxes in a business bankruptcy? This article looks at the two main types of business bankruptcy (Chapter 11 Reorganization and Chapter 7 Liquidation) and discusses the tax implications for different types of legal types.
Answer:
Bankruptcy and Taxes
The tax implications for bankruptcy depend on both the type of bankruptcy and the type of business entity.
Here is some information to help you determine tax obligations in bankruptcy.
Taxes Before Filing Bankruptcy
Before filing bankruptcy, the petitioner (the business) must prove that it filed the last 4 years of tax returns. It must submit a copy of the most recent return to the bankruptcy court and to any creditors who request a copy.
Partnerships and Corporations
The filing requirements for a business do not change during the bankruptcy process. When a partnership or corporation is in the bankruptcy process, the court-appointed trustee is responsible for filing the regular income tax returns for the business on the appropriate forms. However, the trustee may apply for an exemption from filing taxes for a corporation. To qualify, the corporation must have ceased business operations and must have neither assets nor income for the tax year.
Debt Cancellation and Taxes
In general, if a debt is canceled in bankruptcy, it is subject to taxation. A partnership's debt that is canceled because of bankruptcy is not included in the partnership's income.
It may or may not be included in the individual partners' income.
Priority Claim of Taxes Due
Tax debts, along with other debt claims of the business, are paid according to an assigned priority.
- Income taxes in certain cases, withholding taxes (on income taxes withheld from employees), employment taxes, and excise taxes are included in the 8th priority.
- Taxes incurred during the trustee's administration are given second priority, as administrative expenses.
- Employee portions of employment taxes on the first $10,950 of wages that they earned during the 180-day period before the date of your bankruptcy filing or the cessation of your business (whichever occurs first) is given fourth priority treatment.
- The employer's of the employment taxes on these wages, as the employer, is given eighth priority treatment.