Forgiven Debt Exempt From Income Requires Tax Attribute Consideration IRS Form 982 - John R. Dundon II, Enrolled Agent
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Forgiven Debt Exempt From Income Requires Tax Attribute Consideration IRS Form 982

Forgiven Debt Exempt From Income Requires Tax Attribute Consideration IRS Form 982

If you are forgiven debt and that forgiven debt is not considered income then you should prepare and file IRS Form 982 – Reduction of Tax Attributes Due to Discharge of Indebtedness.

Generally, the amount by which you benefit from the discharge of indebtedness is included in your gross income.  However, under certain circumstances described in section 108 such as bankruptcy and insolvency, you can exclude the amount of discharged indebtedness from your gross income.  You must however according to the form’s instructions file IRS Form 982 to report the amount excluded from income and the reduction of certain tax attributes dollar for dollar of the related investment in plant, property and equipment, etc.

If it is other business related debt that is forgiven or discharged for example then use Part I of Form 982 to indicate why any amount received from the discharge of indebtedness should be excluded from gross income and the amount excluded.  Use Part II to report your reduction of tax attributes. The reduction must be made in the following order unless you check the box on line 1d for qualified real property business indebtedness or make the election on line 5 to reduce basis of depreciable property first. If you are a small business owner with a basis in a building that was repossessed that you ran your operations out of AND you had a Net Operating Loss (including carry forwards) the underlined preceding sentence is the most important thing to remember from this post.  There are many reasons to consider foregoing basis in advance of NOL.  Respond to me directly for more insight if you wish.  Nevertheless unless you elect otherwise the oder with which you are to reduce your tax attributes are as follows:

  1. Any net operating loss (NOL) for the tax year of the discharge (and any NOL carryover to that year (dollar for dollar);

  2. Any general business credit carryover to or from the tax year of the discharge (33 1⁄3 cents per dollar);

  3. Any minimum tax credit as of the beginning of the tax year immediately after the tax year of the discharge (33 1⁄3 cents per dollar);

  4. Any net capital loss for the tax year of the discharge (and any capital loss carryover to that tax year) (dollar for dollar);

  5. The basis of property (dollar for dollar);

  6. Any passive activity loss (dollar for dollar) and credit (33 1⁄3 cents per dollar) carryovers from the tax year of the discharge; and

  7. Any foreign tax credit carryover to or from the tax year of the discharge (33 1⁄3 cents per dollar).

Use Part III to exclude from gross income under section 1081(b) any amounts of income attributable to the transfer of property described in that section.



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