I will respond to your follow-up point and questions:
- You should be able to support the position noted. While I have not run the figures, I do believe you end up in the same economic position.
- The S corporation should issue the LLC a form 1099-C. This cancellation of debt will be income to the LLC.
- The LLC will file a final 1065 and K-1's to the members
- Yes this "loss" will show up on the S corporation. You previously had the note set-up as an asset (note or loan receivable). You will credit this for whatever the amount is to zero it out and the debit will be capital loss for the P&L. This short-term capital loss will be separately stated on the K-1's.
- Yes you should include an attachment with the information you noted.
- Nice work on your part on attempting to figure all this out. Kudos to you.
*A reminder that posts in a forum such as this do not constitute tax advice.
Also keep in mind the date of replies, as tax law changes.
