Tax Planning when Filing Chapter 11 Bankruptcy

When filing for chapter 11 bankruptcy you need to plan your taxes properly to ensure the least cost to yourself or your business. In the case of chapter 11 bankruptcy, certain special tax provisions come into play. You need to be aware of these provisions and time your chapter 11 filing accurately to avoid being burdened with taxes that you will be unable to pay. While certain taxes such as income tax are exempt in most cases, others such as property taxes need to be paid.

Priority Tax Liabilities

In case an individual is filing for chapter 11 bankruptcy they need to consider priority tax liabilities and capital gains. They will also need a copy of the previous year’s tax return. Priority tax liabilities are unsecured claims that need to be paid to a government body, for instance unpaid property taxes. It is best if you settle such claims before you file for chapter 11 bankruptcy as it is you who will be personally held liable for the interest on these amounts and not the bankruptcy estate. What will be waived are the penalties that you might otherwise have to pay for the delay. When paying back taxes, ensure that you pay the current year’s taxes as well.

Taxable Gains

Yet another issue with chapter 11 bankruptcy is that of taxable gains. In case you have assets with built in gains and the liquidity to pay the taxes, deal with the taxes before you file for bankruptcy. In some instances you might be able to offset the gains against net operating loss carryovers. This too is a strategy that can be used to deal with taxable gains. In case you do not take these steps, the bankruptcy trustee might just decide to abandon the asset that is tax burdened. You will then be liable to pay the requisite taxes and not have the liquidity to do so. This is a situation that you must take steps to avoid.

Most debt discharged under chapter 11 is excluded from gross income, that is, you do not have to pay a tax on it. Also, the tax payer is the estate and not the individual debtor.

There are certain tax advantages when you file for bankruptcy. This includes a standard omission from gross income of sums that need to be paid to discharge the indebtedness. There are similar omissions from state and local taxes as well.

By keeping these facts in mind, you will be better able to plan your taxes before you file for chapter 11 bankruptcy.

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