AICPA - Debt Discharge under Sec. 108: Partnerships vs. S Corps. 10/24/13 12:33 PM AcA Sign In I My Account I About I Volunteer I Join I Press I For the Public I Help l3VN h A it Debt Discharge Under Sec. 108: Partnerships vs. S Corps. TAX CLINIC LItte el d fi 111“4.e DeeweurC:. CPA 2C 010r. story. Slims &Strad CPAs. Si. Petersburg FP. Puels sow, tatheeia mow ce,vcrreten sisA eel Gross Income As tax liability for cancellation of debt (COD) income gives many taxpayers an unpleasant surprise in today's economy, its tax treatment continues to be a focal point for tax professionals in tax planning and preparation. The primary difference regarding debt discharge between businesses that are organized as partnerships and those organized as S corporations is the application of Sec. 108 and its effect on the passthrough character of the debt discharge. In a partnership, the partner recognizes a pro rata share of COD income in full and applies Sec. 108 at the partner level (Sec. 108(d)(6)). In contrast, COD income in an S corporation is recognized at the corporate level where the taxable portion after the application of Sec. 108 is realized and passed through to the shareholders (Sec. 108(d)(7)(A)). Sec. 108(a)(1) allows for exclusion of COD income from gross income where the debt discharge: 1. Occurs in a Title 11 case (bankruptcy); 2. Occurs when the taxpayer is insolvent; 3. Is qualified farm indebtedness; 4. Is qualified real property business indebtedness (other than for a C corporation); or 5. Is qualified principal residence indebtedness discharged prior to Jan. 1 2013 (currently proposed legislation would extend this date by one year). In addition the ordering rules in Sec. 108(b)(2) for reducing tax attributes by the amount of excluded COD income applies differently to partnerships and S corporations. This item compares the tax results of debt discharge for partnerships and S corporations and the effect on the stakeholder in ea