{"id":3818,"date":"2021-01-07T15:45:47","date_gmt":"2021-01-07T15:45:47","guid":{"rendered":"https:\/\/patellawoffices.com\/blog\/?p=3818"},"modified":"2021-01-08T15:07:51","modified_gmt":"2021-01-08T15:07:51","slug":"canceled-debt-taxable-or-not","status":"publish","type":"post","link":"https:\/\/patellawoffices.com\/blog\/planning-for-tax-minimization\/canceled-debt-taxable-or-not\/","title":{"rendered":"Canceled Debt: Taxable or Not"},"content":{"rendered":"\n

<\/p>\n\n\n\n

During the pandemic many clients\u2019 businesses\nhave adversely impacted by lockdowns and many negotiations between borrowers\nand lenders have occurred or will occur in 2021. There will be many loan modifications,\nbankruptcies, and foreclosures. In order to properly analyze the tax\nconsequences, advisors should be well versed in Section 108, exclusions\nto cancellation of debt income. <\/p>\n\n\n\n

In general, if a lender forgives a taxpayer\u2019s\ndebt, generally, that forgiveness creates taxable \u201ccancellation of debt\u201d (COD)\nincome under Section 61(a)(11). You must report any taxable amount of a canceled debt as\nordinary income from the cancellation of debt on Form 1040, U.S.\nIndividual Income Tax Return<\/a> as “other income” if the\ndebt is a nonbusiness debt, or on an applicable schedule if the debt is a\nbusiness debt. <\/p>\n\n\n\n

After a debt is canceled, the creditor may send a Form 1099-C,\nCancellation of Debt<\/a> showing the amount of cancellation of debt\nand the date of cancellation, among other things. If you received a Form 1099-C\nshowing incorrect information, contact the creditor to make corrections. For\nexample, if the creditor is continuing to try to collect the debt after sending\n Form 1099-C, the creditor may not have\ncanceled the debt and, as a result, there may not be income from a canceled\ndebt. <\/p>\n\n\n\n

Amounts that meet the requirements for any of the following\nexclusions are not included in income, even though they are cancellation of\ndebt income.<\/p>\n\n\n\n

Exclusions from COD Income:<\/h2>\n\n\n\n
  1. Debt canceled in a Title\n 11 bankruptcy case (Section 108(a)(1)(A), which provides that no COD\n income arises if the debt is forgiven as part of a chapter 11 bankruptcy)<\/li>
  2. Debt canceled to the\n extent insolvent (Section 108(a)(1)(B), which excludes COD income to the\n extent the borrower is \u201cinsolvent\u201d, meaning the liabilities exceed the FMV\n of the borrower\u2019s assets)<\/li>
  3. Cancellation of qualified farm indebtedness<\/li>
  4. Cancellation of qualified real property\n business indebtedness<\/li>
  5. Cancellation of qualified\n principal residence indebtedness that is discharged subject to an\n arrangement that is entered into and evidenced in writing before January\n 1, 2021 (Section 108(a)(1)(E), which allows an individual to exclude COD\n income upon the forgiveness of a mortgage on the taxpayer\u2019s principal\n residence)<\/li><\/ol>\n\n\n\n

    Generally, if you exclude canceled debt from income under one of\nthe exclusions listed above, you must reduce certain tax attributes (certain\ncredits and carryovers, losses and carryovers, basis of assets, etc.) (but not\nbelow zero) by the amount excluded. You must attach to your tax return a Form 982, Reduction\nof Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis\nAdjustment)<\/a> to report the amount qualifying for exclusion and\nany corresponding reduction of those tax attributes. For cancellation of\nqualified principal residence indebtedness that you exclude from income, you\nmust only reduce your basis in your principal residence.<\/p>\n","protected":false},"excerpt":{"rendered":"

    During the pandemic many clients\u2019 businesses have adversely impacted by lockdowns and many negotiations between borrowers and lenders have occurred or will occur in 2021. There will be many loan modifications, bankruptcies, and foreclosures. In order to properly analyze the tax consequences, advisors should be well versed in Section 108, exclusions to cancellation of debt […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_daextam_enable_autolinks":"","_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[1],"tags":[],"class_list":["post-3818","post","type-post","status-publish","format-standard","hentry","category-planning-for-tax-minimization"],"_links":{"self":[{"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/posts\/3818","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/comments?post=3818"}],"version-history":[{"count":2,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/posts\/3818\/revisions"}],"predecessor-version":[{"id":3823,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/posts\/3818\/revisions\/3823"}],"wp:attachment":[{"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/media?parent=3818"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/categories?post=3818"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/tags?post=3818"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}