If the debtor is an individual who files for bankruptcy under chapter 7 or 11, the bankruptcy estate is treated as a new taxable entity, separate from the individual taxpayer.
The estate in a chapter 7 case is represented by a trustee. The trustee is appointed under the Bankruptcy Code to administer the estate and liquidate any nonexempt assets of the estate. In chapter 11, the debtor often remains in control of the assets as a "debtor-in-possession" and acts as the bankruptcy trustee. See Taxes and the Bankruptcy Estate, later.
If the debtor filed a chapter 7 or 11 case, the debtor must file a Form 1040 for the tax year involved. The bankruptcy trustee files a Form 1041 for the bankruptcy estate. If the debtor is in chapter 11 bankruptcy and remain as the debtor-in-possession, the debtor must file both a Form 1040 and the Form 1041 for the bankruptcy estate (if the estate meets the return filing requirements).
If a husband and wife file a joint bankruptcy petition and their bankruptcy estates are jointly administered, their estates must be treated as two separate entities for tax purposes. Two separate tax returns must be filed (if they separately meet the filing requirements). taxmap/pubs/p908-002.htm#en_us_publink1000137311
If the debtor is an individual debtor in a chapter 7 or 11 case, the debtor may be able to elect to close the debtor's tax year for the year in which the bankruptcy petition is filed, as of the day before the date on which the bankruptcy case commences. If the debtor makes the election, the debtor's tax year is divided into 2 short tax years of less than 12 months each. The first year ends on the day before the commencement date and the second year begins on the commencement date. If the election is made, the debtor federal income tax liability for the first short tax year becomes an allowable claim against the bankruptcy estate as a claim arising before the bankruptcy filing. The tax liability for the first short tax year, not subject to discharge under the Bankruptcy Code, can be collected from the estate.
If the debtor does not make an election to end the tax year, the commencement of the bankruptcy case does not affect the debtor's tax year. Also, no part of the debtor's income tax liability for the year in which the bankruptcy case commences can be collected from the bankruptcy estate. The debtor cannot make a short-year election if the debtor has no assets in the bankruptcy estate other than exempt property.taxmap/pubs/p908-002.htm#en_us_publink1000117997
The debtor can elect to end the debtor's tax year by filing a return on Form 1040 for the first short tax year. The return must be filed on or before the 15th day of the fourth full month after the end of that first tax year.taxmap/pubs/p908-002.htm#en_us_publink1000117998
Jane Doe, an individual calendar year taxpayer, filed a bankruptcy petition under chapter 7 or 11 on May 8, 2007. If Jane elected to close her tax year at the commencement of her case, Jane's first short year for 2007 ran from January 1 through May 7, 2007, and closed on May 7, 2007. Jane's second short year ran from May 8, 2007, through December 31, 2007. To have a timely filed election for the first short year, Jane must file Form 1040 (or an extension) for the period January 1 through May 7 by September 15.
To avoid delays in processing the return, write "Section 1398 Election" at the top of the return. The debtor may also make the election by attaching a statement to Form 4868. The statement must say that the debtor chooses under IRC section 1398(d)(2) to close the debtor's tax year on the day before the filing of the bankruptcy case. The debtor must file Form 4868 by the due date of the return for the first short tax year. If the debtor's spouse decides to also close his or her tax year, see Election by debtor's spouse, next.taxmap/pubs/p908-002.htm#en_us_publink1000117999
If the debtor is married, the debtor's spouse may join in the election to end the tax year. If the debtor and spouse make a joint election, the debtor must file a joint return for the first short tax year. The debtor must make these choices by the due date for filing the return for the first short tax year. Once the choice is made, it cannot be revoked for the first year. However, the choice does not mean the debtor and the spouse must file a joint return for the second short tax year. taxmap/pubs/p908-002.htm#en_us_publink1000118000
If the debtor's spouse files for bankruptcy later in the same year, he or she may also choose to end his or her tax year, regardless of whether he or she joined in the choice to end the debtor's tax year. Because each of them has a separate bankruptcy, one or both of them may have 3 short tax years in the same calendar year. If the debtor's spouse joined in the debtor's choice, or if the debtor had not made the choice to end the tax year, the debtor can join in the spouse's choice. But if the debtor made an election and the spouse did not join in the election, the debtor cannot join in the spouse's later election. This is because the debtor and the spouse have different tax years. The debtor does not have a tax year ending the day before the spouse's filing for bankruptcy, and the debtor cannot file a joint return for a year ending on the day before the spouse's filing of bankruptcy. taxmap/pubs/p908-002.htm#en_us_publink1000118001
Paul and Mary Harris are calendar-year taxpayers. Paul's voluntary chapter 7 bankruptcy case begins on March 4.
If Paul does not make an election, his tax year does not end on March 3. If he makes an election, Paul's first tax year is January 1–March 3, and his second tax year begins on March 4. Mary could join in Paul's election as long as they file a joint return for the tax year January 1–March 3. They must make the election by July 15, the due date for filing the joint return.taxmap/pubs/p908-002.htm#en_us_publink1000118002
Fred and Ethel Barnes are calendar-year taxpayers. Fred's voluntary chapter 7 bankruptcy case begins on May 6, and Ethel's bankruptcy case begins on November 1 of the same year.
Ethel could choose to end her tax year on October 31. If Fred did not elect to end his tax year on May 5, or if he elected to do so but Ethel had not joined in his election, Ethel would have 2 tax years in the same calendar year if she decided to close her tax year. Her first tax year is January 1–October 31, and her second year is November 1–December 31.
If Fred did not end his tax year as of May 5, he could join in Ethel's choice to close her tax year on October 31, but only if they file a joint return for the tax year January 1–October 31.
If Fred elected to end his tax year on May 5, but Ethel did not join in Fred's choice, Fred could not join in Ethel's choice to end her tax year on October 31, because they could not file a joint return for that short year. They could not file a joint return because their tax years preceding October 31 were not the same.taxmap/pubs/p908-002.htm#en_us_publink1000118003
Jack and Karen Thomas are calendar-year taxpayers. Karen's voluntary chapter 7 bankruptcy case began on April 10, and Jack's voluntary chapter 7 bankruptcy case began on October 3 of the same year. Karen chose to close her tax year on April 9 and Jack joins in Karen's choice.
Under these facts, Jack would have 3 tax years for the same calendar year if he makes the election relating to his own bankruptcy case. The first tax year would be January 1–April 9; the second, April 10–October 2; and the third, October 3–December 31.
Karen may join in Jack's election if they file a joint return for the second short tax year (April 10–October 2). If Karen does join in, she would have the same 3 short tax years as Jack. Also, if Karen joins in Jack's election, they may file a joint return for the third tax year (October 3–December 31), but they are not required to do so.taxmap/pubs/p908-002.htm#en_us_publink1000118004
If the debtor chooses to close the tax year, the debtor must annualize the taxable income for each short tax year the same way it is done for a change in an annual accounting period. See Short Tax Year in Publication 538, for information on how to annualize the debtor's income and to figure the tax for the short tax year. taxmap/pubs/p908-002.htm#en_us_publink1000118005
If the debtor elects to end the tax year on the day before filing the bankruptcy case, the debtor must file the return for the first short tax year as explained earlier under Making the election.
If the debtor makes this election, the debtor must also file a separate Form 1040 for the second short tax year by the regular due date. To avoid delays in processing the return, write "Second Short Year Return After Section 1398 Election" at the top of the return.
If the bankruptcy case is later dismissed, the debtor must file amended returns to replace all full or short year returns filed as a result of the bankruptcy case. Attach a statement to the amended returns explaining why the debtor is filing an amended return. In this situation, no bankruptcy estate is created for tax purposes. Income that was or would have been reported by the bankruptcy estate must be reported on the debtor's amended returns.taxmap/pubs/p908-002.htm#en_us_publink1000137324
The commencement of a bankruptcy case creates an estate, which generally includes all legal or equitable interests in property of the debtor as of the commencement of the case. There are certain exceptions. Exempt property and abandoned property are initially part of the bankruptcy estate, but are subsequently removed from the estate. Excluded property is never included in the estate.
When an individual files a bankruptcy petition under chapter 7 or 11, the bankruptcy estate is treated as a separate taxable entity from the debtor. The trustee or debtor-in-possession is responsible for preparing and filing the estate's tax returns and paying its taxes. The debtor remains responsible for filing his or her own returns and paying taxes on income that does not belong to the estate.
Before filing tax returns for the bankruptcy estate, the trustee or debtor-in-possession must obtain an employer identification number (EIN) for the estate. The trustee or debtor-in-possession uses the EIN on any tax returns filed for the estate, including estimated tax returns. See Employer identification number, later.
If the debtor is an individual in a chapter 7 or 11 bankruptcy, do not include on the debtor's individual income tax return the income, deductions, or credits that belong to the bankruptcy estate. Also, do not include as income on the debtor's return any debts canceled because of bankruptcy. However, the bankruptcy estate must reduce certain losses, credits, and the basis in property (to the extent of these items) by the amount of canceled debt. See Debt Cancellation, later.
If the debtor is an individual in a chapter 7 or 11 case and the bankruptcy court dismissed the case, the estate is no longer treated as a separate taxable entity. The debtor is treated as if the bankruptcy petition was never filed. The debtor must file amended returns on Form 1040X to replace the returns previously filed for the bankruptcy estate. Include on the amended returns the items of income, deductions, and credits that were reported by the bankruptcy estate on its returns and were not reported on returns the debtor previously filed.
The debtor may not be able to claim certain deductions such as administrative expenses of the estate and the bankruptcy exclusion that the estate could have claimed. Also, the bankruptcy exclusion cannot be used to exclude debt that was canceled while the debtor was under the bankruptcy court's protection. But the other exclusions (such as insolvency) may apply.
The gross income of the bankruptcy estate includes any of the debtor's gross income to which the estate is entitled under the Bankruptcy Code. It also includes income generated by the bankruptcy estate, from property in the estate, after the commencement of the case.
Gross income of the estate does not include amounts received or accrued by the debtor before the commencement of the case. Additionally, gross income of the estate in a chapter 7 case does not include any income that the debtor earns after the bankruptcy petition date.taxmap/pubs/p908-002.htm#en_us_publink1000133021
For chapter 11 individual cases filed before October 17, 2005, gross income of the estate is determined in the same manner as in chapter 7 cases involving individuals. Notably, gross income of the estate generally does not include any income that the debtor earns after the commencement of the bankruptcy case.
For cases filed after October 16, 2005, earnings from services performed by an individual debtor after the commencement of the chapter 11 case are property of the bankruptcy estate under 11 U.S.C. section 1115. Under IRC section 1398(e)(1), gross income of the estate includes income that the debtor earns for services performed after the bankruptcy petition date and should be included on the estate's return in cases filed after October 17, 2005.
If a chapter 11 case is converted to a chapter 13 case, the chapter 13 estate is not a separate taxable entity and earnings from post-conversion services and income from property of the estate realized after the conversion to chapter 13 are taxed to the debtor. If the chapter 11 case is converted to a chapter 7 case, 11 U.S.C. section 1115 does not apply after conversion and:
- Earnings from post-conversion services will be taxed to the debtor, rather than the estate, and
- The property of the chapter 11 estate will become property of the chapter 7 estate.
Any income on this property will be taxed to the estate even if the income is realized after the conversion to chapter 7. If a chapter 11 case is dismissed, the debtor is treated as if the bankruptcy case had never been filed and as if no bankruptcy estate had been created.
A debtor-in-possession may be compensated by the estate for managing or operating a trade or business that the debtor conducted before the commencement of the bankruptcy case. For cases filed after October 16, 2005, such payments should be reported by the debtor as miscellaneous income on his or her individual income tax return. Amounts paid by the estate to the debtor-in-possession for managing or operating the trade or business may qualify as administrative expenses of the estate. See Administrative expenses, later.taxmap/pubs/p908-002.htm#en_us_publink1000133022
For chapter 11 cases of individuals filed after October 16, 2005, within a reasonable time after the commencement of a chapter 11 bankruptcy case, the trustee or the debtor-in-possession should provide notification of the bankruptcy estate's EIN to persons that are required to file information returns for the bankruptcy estate's gross income, gross proceeds, or other types of reportable payments. See IRC section 6109(a)(2). Because these payments are the property of the estate under 11 U.S.C. section 1115 for chapter 11 cases filed after October 16, 2005, the payors should report the gross income, gross proceeds, or other reportable payments on the appropriate information return using the estate's name and EIN as required under the IRC and regulations (see IRC sections 6041 through 6049).
The trustee or debtor-in-possession should not, however, provide the EIN to a person filing Form W-2 reporting the debtor's wages or other compensation, as 11 U.S.C. section 1115 does not affect the determination of what are wages for purposes of federal income tax withholding or the Federal Insurance Contributions Act (FICA). See IRC sections 3121(a) and 3401(a). An employer should continue to report all wage income and tax withholding, both pre-petition and post-petition, on a Form W-2 to the debtor under the debtor's social security number.
When a chapter 11 bankruptcy case is closed, dismissed, or converted to a chapter 12 or 13 case, the bankruptcy estate ends as a separate taxable entity. The debtor should, within a reasonable time, send notice of such event to the persons previously notified of the bankruptcy case to ensure that gross income and proceeds and other reportable payments realized after the event are reported to the debtor under the correct TIN rather than the estate.
If a chapter 11 case is converted to a chapter 7 case, the bankruptcy estate will continue to exist as a separate taxable entity. Gross income (other than post-conversion income from the debtor's services), gross proceeds, or other reportable payments should continue to be reported to the estate if they are property of the chapter 7 estate. Income from services performed by the debtor after conversion of the case to chapter 7 is not property of the chapter 7 estate. After the conversion, the debtor should notify payors required to report the debtor's nonemployee compensation that compensation earned after the conversion should be reported using the debtor's name and TIN, and not the estate's name and EIN.
The debtor in a post-BAPCPA chapter 11 case is not required to file a new Form W-4 with an employer solely because the debtor filed a chapter 11 case and the post-petition wages are includible in the estate's income and not the debtor's income. However, a new Form W-4 may be necessary if the debtor is no longer entitled to claim the same number of allowances previously claimed because certain deductions or credits now belong to the estate. See Employment Tax Regulations section 31.3402(f)(2)-1. The debtor may wish to file a new Form W-4 to increase the income tax withheld from post-petition wages allocated to the estate to avoid having to make estimated tax payments for the estate. See IRC section 6654(a).taxmap/pubs/p908-002.htm#en_us_publink1000133023
IRC section 1401 imposes a tax upon the self-employment income of every individual. Self-employment income is the net earnings from self-employment derived by an individual. Net earnings from self-employment are gross income from self-employment less deductions attributable to the business. Neither 11 U.S.C. section 1115 nor IRC section 1398 addresses the application of the self-employment tax to the earnings from the individual debtor's continuing services. Because the debtor continues to derive gross income from the performance of services as a self-employed individual after the commencement of the bankruptcy case, the debtor must continue to report the debtor's individual income on Schedule SE (Form 1040) of the debtor's income tax return. The schedule includes the self-employment income earned post-petition and the attributable deductions. The debtor must pay any self-employment tax imposed by IRC section 1401.taxmap/pubs/p908-002.htm#en_us_publink1000133024
Chapter 11 cases of individuals filed after October 16, 2005, post-petition wages earned by a debtor are generally treated as gross income of the estate. The reporting and withholding obligations of a debtor's employer have not changed. 11 U.S.C. section 1115 does not affect the determination of wages under the FICA. See IRC section 3121(a). Similarly, the determination of wages for Federal Unemployment Tax Act (FUTA) tax or Federal Income Tax Withholding purposes is not affected. See IRC sections 3306(b) and 3401(a). Because 11 U.S.C. section 1115 does not affect the application of FICA tax, FUTA tax, or Federal Income Tax Withholding wages of a chapter 11 debtor, an employer should continue to report the wages and tax withholding on a Form W-2 issued under the debtor's name and social security number.taxmap/pubs/p908-002.htm#en_us_publink1000133025
For chapter 11 cases, if an employer issues a Form W-2 reporting all of the debtor's wages, salary, or other compensation for a calendar year, and a portion of the earnings represent post-petition services includible in the estate's gross income, the Form W-2 amounts must be allocated between the estate and the debtor. The debtor-in-possession or the trustee must allocate the amounts reported in box 1 and the withheld income tax reported in box 2 of Form W-2 between the debtor and the estate. The allocations must reflect that the debtor's gross earnings from post-petition services and gross income from post-petition property are, generally, includible in the estate's gross income and not the debtor's gross income. The debtor and trustee may use a simple percentage method to allocate income and withheld income tax. The same method must be used to allocate the income and the withheld tax.taxmap/pubs/p908-002.htm#en_us_publink1000141576
If 20% of the wages reported on Form W-2 for a calendar year were earned after the commencement of the case and are included in the estate's gross income, 20% of the withheld income tax reported on Form W-2 must also be claimed as a credit on the estate's income tax return. Likewise, 80% of wages must be reported by the debtor and 80% of the withheld income tax must be claimed as a credit on the debtor's income tax return. See IRC section 31(a).
If information returns are issued to the debtor for gross income, gross proceeds, or other reportable payments that should have been reported to the bankruptcy estate, the debtor-in-possession or trustee must allocate the improperly reported income in a reasonable manner between the debtor and the estate. In general, the allocation must ensure that any income and income tax withheld attributable to the post-petition period is reported on the estate's return, and any income and income tax withheld attributable to the pre-petition period is reported on the debtor's return.
The debtor must attach a statement to his or her income tax return stating that the return is filed subject to a chapter 11 bankruptcy case. The statement must also:
- Show the allocations of income and withheld income tax,
- Describe the method used to allocate income and withheld tax, and
- List the filing date of the bankruptcy case, the bankruptcy court in which the case is pending, the bankruptcy court case number, and the bankruptcy estate's EIN.
The debtor-in-possession or trustee must attach a similar statement to the estate's income tax return.
The above Notice 2006-83 Statement, 2006-40 I.R.B. 596, may be used by debtors, debtors-in-possession, and trustees.taxmap/pubs/p908-002.htm#en_us_publink1000134865
|Notice 2006-83 Statement|
|Pending Bankruptcy Case|
|The taxpayer, , filed a bankruptcy petition under chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the District of . The bankruptcy court case number is . Gross income, and withheld federal income tax, reported on Form W-2, Forms 1099, Schedule K-1, and other information returns received under the taxpayer's name and social security number (or other taxpayer identification number) are allocated between the taxpayer's TIN and the bankruptcy estate's EIN as follows, using [describe allocation method]: . |
| || Year||Taxpayer|| ||Estate|
|1.||Form W-2, Payor: ||$|| ||$|| |
| ||Withheld income tax shown on Form W-2||$|| ||$|| |
|2.||Form 1099-INT Payor: ||$|| ||$|| |
| ||Withheld income tax (if any) shown on Form 1099-INT||$|| ||$|| |
|3.||Form 1099-DIV Payor: ||$|| ||$|| |
| ||Withheld income tax (if any) shown on Form 1099-DIV||$|| ||$|| |
|4.||Form 1099-MISC Payor: ||$|| ||$|| |
| ||Withheld income tax (if any) shown on Form 1099-MISC||$|| ||$|| |
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.
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. taxmap/pubs/p908-002.htm#en_us_publink1000137326
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.
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.
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.taxmap/pubs/p908-002.htm#en_us_publink1000137327
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:
- NOL carryovers,
- Carryovers of excess charitable contributions,
- Recovery of tax benefit items,
- Credit carryovers,
- Capital loss carryovers,
- Basis, holding period, and character of assets,
- Method of accounting,
- Passive activity loss and credit carryovers,
- Unused at-risk deductions, and
- Other tax attributes as provided in regulations.
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.taxmap/pubs/p908-002.htm#en_us_publink1000137328
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. taxmap/pubs/p908-002.htm#en_us_publink1000137329
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.
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.
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.taxmap/pubs/p908-002.htm#en_us_publink1000137330
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. taxmap/pubs/p908-002.htm#en_us_publink1000137331
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.taxmap/pubs/p908-002.htm#en_us_publink1000137332
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. taxmap/pubs/p908-002.htm#en_us_publink1000137333
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.
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.
The filing of a tax return for the bankruptcy estate does not relieve the individual debtor of his or her tax filing requirement.
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. taxmap/pubs/p908-002.htm#en_us_publink1000137336
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:
- Online by clicking on the EIN link at www.irs.gov/businesses/small. The EIN is issued immediately once the application information is validated.
- On the telephone at 1-800-829-4933, or
- By mailing or faxing Form SS-4.
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.
The social security number of the individual debtor cannot be used as the EIN for the bankruptcy estate.
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.
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.taxmap/pubs/p908-002.htm#en_us_publink1000137339
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.
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.taxmap/pubs/p908-002.htm#en_us_publink1000137340taxmap/pubs/p908-002.htm#en_us_publink1000137341
This publication is not revised annually. Future changes to the forms and their instructions may not be reflected in this example.
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.
The estate received the following assets from Mr. Smith:
- A $100,000 certificate of deposit,
- Commercial rental real estate with a fair market value (FMV) of $280,000, and
- His personal residence with an FMV of $200,000.
Also, the estate received a $251,500 capital loss carryover.
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.taxmap/pubs/p908-002.htm#en_us_publink1000137342
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.taxmap/pubs/p908-002.htm#en_us_publink1000137343
Joan enters the depreciation allowed on Form 4562. She completes the form and enters the result on Schedule E.taxmap/pubs/p908-002.htm#en_us_publink1000137344
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.taxmap/pubs/p908-002.htm#en_us_publink1000137345
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).
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).taxmap/pubs/p908-002.htm#en_us_publink1000137346
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.taxmap/pubs/p908-002.htm#en_us_publink1000137347
Joan completes page 1 of the Form 1040 and enters the adjusted gross income on the first line of Form 1040, page 2.taxmap/pubs/p908-002.htm#en_us_publink1000137348
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.taxmap/pubs/p908-002.htm#en_us_publink1000137349
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.taxmap/pubs/p908-002.htm#en_us_publink1000137350
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).taxmap/pubs/p908-002.htm#en_us_publink1000137351
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.
taxmap/pubs/p908-002.htm#TXMP7d0215ffSample Form 1040 - page 1 taxmap/pubs/p908-002.htm#en_us_publink1000137353
taxmap/pubs/p908-002.htm#TXMP0a052569Sample Form 1040 - page 2 taxmap/pubs/p908-002.htm#en_us_publink1000137354
taxmap/pubs/p908-002.htm#TXMP6b9e4f34Sample Schedule A taxmap/pubs/p908-002.htm#en_us_publink1000137355
taxmap/pubs/p908-002.htm#TXMP1c997fa2Sample Schedule B taxmap/pubs/p908-002.htm#en_us_publink1000137356
taxmap/pubs/p908-002.htm#TXMP7a6fd1e8Sample Schedule D taxmap/pubs/p908-002.htm#en_us_publink1000137357
taxmap/pubs/p908-002.htm#TXMP0d68e172Sample Schedule E taxmap/pubs/p908-002.htm#en_us_publink1000137358
taxmap/pubs/p908-002.htm#TXMP152f3389Sample Form 4797 - page 1 taxmap/pubs/p908-002.htm#en_us_publink1000137359
taxmap/pubs/p908-002.htm#TXMP6228031fSample Form 2119 taxmap/pubs/p908-002.htm#en_us_publink1000137360
taxmap/pubs/p908-002.htm#TXMP75e8ba6cSample Form 4797 - page 2 taxmap/pubs/p908-002.htm#en_us_publink1000137361
taxmap/pubs/p908-002.htm#TXMP02ef8afaSample Form 4562 taxmap/pubs/p908-002.htm#en_us_publink1000151941
taxmap/pubs/p908-002.htm#TXMP641924c0Sample Form 982
Capital Loss Carryover Worksheet—Lines 6 and 14Use this worksheet to figure your capital loss carryovers from 2007 to 2008 if your 2007 Schedule D, line 21, is a loss and (a) that loss is a smaller loss than the loss on your 2007 Schedule D, line 16, or (b) the amount on your 2007 Form 1040, line 41 (or your 2007 Form 1040NR, line 38, if applicable) is less than zero. Otherwise, you do not have any carryovers.
|1.||Enter the amount from your 2007 Form 1040, line 41, or Form 1040NR, line 38. If a loss, enclose the amount in parentheses||1.||19,880|| |
|2.||Enter the loss from your 2007 Schedule D, line 21, as a positive amount||2.||1,500|| |
|3.||Combine lines 1 and 2. If zero or less, enter -0-||3.||21,380|| |
|4.||Enter the smaller of line 2 or line 3 ||4.||1,500|| |
| ||If line 7 of your 2007 Schedule D is a loss, go to line 5; otherwise, enter -0- on line 5 and go to line 9.|| || || |
|5.||Enter the loss from your 2007 Schedule D, line 7, as a positive amount||5.||0|| |
|6.||Enter any gain from your 2007 Schedule D, line 15. If a loss, enter -0-||6.|| || || || |
|7.||Add lines 4 and 6||7.||1,500|| |
|8.||Short-term capital loss carryover for 2008. Subtract line 7 from line 5. If zero or less, enter -0-. If more than zero, also enter this amount on Schedule D, line 6 ||8.||0|| |
| ||If line 15 of your 2007 Schedule D is a loss, go to line 9; otherwise, skip lines 9 through 13.|| || || |
|9.||Enter the loss from your 2007 Schedule D, line 15, as a positive amount||9.||75,000|| |
|10.||Enter any gain from your 2007 Schedule D, line 7. If a loss, enter -0-||10.||0|| || || |
|11.||Subtract line 5 from line 4. If zero or less, enter -0-||11.||1,500|| || || |
|12.||Add lines 10 and 11||12.||1,500|| |
|13.||Long-term capital loss carryover for 2008. Subtract line 12 from line 9. If zero or less, enter -0-. If more than zero, also enter this amount on Schedule D, line 14 ||13.||73,500|| |
| || || || || || || |