Chapter 11 bankruptcy is a form of bankruptcy that can be filed by businesses or individuals. Its goal is to give the filer time to reorganize and reduce their debt rather than discharge it. Under this type of bankruptcy, businesses can continue to operate, and individuals can keep certain assets that might otherwise be sold under a different type of bankruptcy.

Going through a Chapter 11 bankruptcy process doesn’t necessarily guarantee that any tax debts will be reduced or discharged, and it doesn’t get the debtor out of current and future tax obligations and filing requirements.

Tax Filing and Payment Requirements When Chapter 11 Bankruptcy Has Been Filed

Regardless of the type of bankruptcy filed, a debtor is still subject to Federal income tax laws and must continue to file tax returns in a timely fashion. Failing to file returns can result in conversion of the bankruptcy to a different type, or even dismissal of the proceedings.

In general, debtors under Chapter 11 bankruptcy should not incur additional debt during the process. They must also make sure they are capable of meeting financial obligations moving forward, including paying taxes due in a timely fashion.

Under bankruptcy law, when an individual debtor files a bankruptcy petition under Chapter 11, a separately taxable bankruptcy estate is set up to take ownership of the debtor’s assets. A separate tax return is required to be filed for that estate, and any taxes due must be paid in a timely manner. This is in addition to the individual tax return and liability that the debtor is required to file and pay. The return must be filed by the trustee of the estate, who in some cases is the bankruptcy filer.

Can Tax Debt Be Forgiven in Chapter 11 Bankruptcy?

The rules surrounding the ability to reduce or discharge tax debt in Chapter 11 bankruptcy can be complicated, but in general, three elements must be satisfied for tax debt to be dischargeable:

1. Taxes can’t be discharged until at least three years after they were due. Example: 2016 taxes were due in April 2017, so they would not be dischargeable until April 2020.
2. A tax return for the taxes owed must have been filed at least two years before bankruptcy. Example: if the 2016 return was filed late or not filed until 2019, the tax wouldn’t be dischargeable until 2021.
3. The taxes must have been assessed within 240 days (roughly eight months) before the bankruptcy filing. In the case of an audit where taxes were reassessed, you would need to wait until 240 days after the audit for the taxes to be dischargeable.

Note that any taxes a debtor attempted to evade willfully as well as penalties for tax fraud are never dischargeable. Also, even if taxes are discharged, a tax lien will remain on the debtor’s property if the IRS recorded it prior to the bankruptcy filing.

Other Considerations

In some situations, the IRS considers canceled debt taxable income, but NOT in the case of Chapter 11 bankruptcy. So, if taxes that were owed are discharged as part of the bankruptcy process, the forgiven amount will not need to be reported as taxable income on your tax return.

If a taxpayer is considering Chapter 11 bankruptcy due to unpaid tax debt, it may be worth exploring other options first, like entering into an installment agreement or offer-in-compromise with IRS. There are fees associated with an installment agreement and penalties and interest continue to accrue, and IRS won’t always accept an offer in compromise, but these are other possible alternatives.

As always, due to the complicated rules surrounding bankruptcy and taxes, it’s important to get legal advice from a bankruptcy lawyer when deciding whether filing for Chapter 11 bankruptcy is the right choice or not.

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Who doesn’t want to pay less taxes, as long as it’s legally permitted? Here are nine tips to consider taking action on before 2020 comes to a close. 

Maximize Retirement Contributions Through Your Employer’s 401(k) Plan

This type of plan allows you to contribute pre-tax dollars to retirement, and contributions directly reduce taxable wage income. While contributions to IRAs and other types of retirement accounts can be done after year-end/up through the due date of your tax return, deferrals through an employer 401(k) plan must be completed by year-end, so make sure you will be able to contribute the desired amount for the year by December 31, 2020.

For tax year 2020, you can contribute up to $19,500 if under age 50, and $26,000 if 50 or older by year-end.

Harvest Investment Losses to Offset Capital Gains

If you have sold stock or other property that has generated capital gains, consider whether you have investment losses you can generate before year-end to reduce to overall capital gain you report and pay tax on. For example, if you have stock that you’ve held for some time that has consistently been in a loss position, selling by year-end will allow you to offset those other capital gains – and also possibly find a better use for those funds that were invested.

It is always ideal to time capital gains and losses in the same year if you can because they can offset each other, and you are only able to deduct up to $3,000 of overall loss per year. So, if you have a large capital gain in one year and a large capital loss in the next, you will have had to pay tax on that capital gain in that first year, but then might not fully realize the benefit of the loss in the latter year for a number of years, because of that $3,000 per year limitation (unless other capital gains come up to offset it). If they happen in the same year, they would be netted together and the tax benefit would be fully received in the current year. Timing is everything!

Bunch Deductions So You Can Itemize

Because the Tax Cuts and Jobs Act (TCJA) both increased the standard deduction and capped the deduction for state and local income taxes paid when itemizing at $10,000, many taxpayers are finding that they benefit more from taking the standard deduction. However, this prevents them from receiving any direct benefit or deduction for certain expenses, like charitable donations and health care costs over a certain level.

One way around this is to strategically time the payment of these costs so you can bunch them together and take advantage of itemizing deductions every other year. For example, if you already made donations earlier in the year and know that you plan to for 2021, consider paying your 2021 donations early – by year-end 2020 – in order to exceed the standard threshold and take advantage of itemizing for the 2020 tax year.

Defer Income

If you are self-employed or an independent contractor, consider delaying invoicing clients for work to time it so you receive the income in January 2021 instead of December 2020. This will allow you to keep that income off of your 2020 return, and therefore hold off on paying tax on that income for another year.

Donate Appreciated Stock to Charity

The benefits of doing this are two-fold: you avoid capital gains tax and also receive a charitable deduction for the appreciated value of the stock. Just be sure that you are actually going to itemize and that you won’t be taking the standard deduction, because the charitable deduction benefit is only available to you if you itemize deductions.

Purchase Business Equipment

If you are a business owner and have been thinking about purchasing equipment for your business (machinery, computers, software, a vehicle, etc.), now is the time to do it!

With the expanded accelerated depreciation options that came out of the TCJA (which will be reduced in future years), many of these items qualify for significantly higher deductions – possibly even 100 percent. Whereas in prior years you may have had to deduct the cost of these items over a number of years, you will now likely be able to deduct them fully in the year purchased, or at least take a much higher first-year deduction. This will reduce the taxable profit of your business, which directly reduces your taxable income and tax liability.

Install Solar Panels

Consider installing solar panels on your home prior to year-end to take advantage of a Federal tax credit that is set to expire in 2022. When you install a solar system, 26 percent of your total project costs can be claimed as a credit on your IRS tax return (this will decrease to 22 percent for 2021). So, if you spend $10,000 on the system, you will directly reduce your tax bill by $2,600.

Invest in a Qualified Opportunity Zone

As part of TCJA, taxpayers can now defer payment of capital gains tax to 2026 by investing the proceeds of a sale in a qualified opportunity zone. These zones are located all over the country and were designated as areas that would benefit from economic development. Tax can be deferred on the portion of the gain that was used to benefit the distressed zone.

The investment must be made within 180 days of the sale that generated the capital gains, so if you’ve already had a property sale in 2020 and would like to explore this, you’ll want to pay attention to the timeframe and act accordingly (also note that due to the COVID-19 pandemic, the 180-day rule was relaxed for those who would have hit the 180-day mark on or after April 1, 2020 and before December 31, 2020 – all now have until December 31, 2020 to invest the gain in a Qualified Opportunity Zone).

Meet with Your Tax Professional to Review Your Projected Tax Bill and Discuss Strategies

It can be extremely beneficial to meet with your tax professional before year-end and review a projection of your tax situation for the year, discussing possible strategies for reducing your tax bill. You may be able to strategize to get yourself in a lower tax bracket and allow for taking advantage of more deductions and credits, which might not be available to you at a higher income level.

In order for your tax professional to project your tax situation/liability for the year, you’ll need to provide information regarding your income for the year – pay stubs, Profit & Loss reports if you have a business, information regarding investment income, details regarding any other types of income, and any changes to your situation from the prior year.

Schedule a time with us in November or early December if you can, to give yourself time to take any necessary actions to reduce your tax bill for the year!

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It goes without saying that 2020 has been quite the year—and it’s not even over yet! Of course, any one of us could easily come up with a long list of things to be ungrateful for, a negative list of every bad occurrence that has taken place since March due to the Coronavirus pandemic. In a sense, being sad or negative or depressed is simple. Being grateful is what’s really difficult, but we want to help you achieve the feat.

Below, we’ve put together different techniques to help you see that there are many things to be grateful for, both in our business and personal lives. This is a great time of year – just before the U.S. holiday of Thanksgiving – to stop and practice gratitude. 

What Are You Grateful For?

The act of being grateful can lead to experiencing positive emotions. As a matter of fact, if you are experiencing negative emotions and don’t want to, the fastest way to “reset” your physiology is to start thinking of things you are grateful for. 

Here are some ideas to help get you started:

Your Health 

Are you healthy? Are you able to see, to smell, to breathe, to walk? Health comes in many various forms; the idea of being healthy can mean something entirely different to two people. Consider what being healthy means to you, and then, if you do think you have your health, try and be grateful for it.

One good thing about the pandemic is that most people are eating more healthful meals and less fast food, and they are feeling better with more energy.  People are also watching their weight and even losing excess pounds, especially after some of the initial reports that overweight people were having a harder time fighting Covid-19 than slimmer people. 

Friends and Family

Are you surrounded by loved ones? Now, more than ever before, it’s important to be grateful for people who are in your life. You may be facing hardships but think how much more difficult times would be if you were dealing with them by yourself. Be grateful for having someone in your life that you can lean on.

Work and Business

So many people have lost their jobs, their income, their sense of security. If you still have work or your business to keep you busy, focused, and earning a steady paycheck, be grateful. It’s a wonderful exercise to express your gratitude to your clients or boss by writing them a thank you note or leaving them a review on Google My Business, Yelp, their Facebook business page, or their LinkedIn profile as a recommendation. 

Similarly, it’s the perfect time of year to ask your clients or boss to leave you a review on one of these digital assets. 

Never Stop Being Grateful

Of course, there are plenty of other things to be grateful for in this world; everyone’s list will look different. Perhaps you’re grateful for a pet or something you’ve achieved. Maybe the fact that you have a special skillset or the ability to be patient and understanding during trying times gives you reason to smile.

That’s the thing about being grateful: there is nothing too big or too small to be grateful for; no right or wrong answer. And while it may feel more difficult this year compared to others, you can always find something when you look hard enough.

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