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IRS.gov Website
Publication 908
taxmap/pubs/p908-007.htm#en_us_publink1000137390

Debt Cancellation(p27)

rule
If a debt is canceled or forgiven, other than as a gift or bequest, the debtor generally must include the canceled amount in gross income for tax purposes. A debt includes any indebtedness for which the debtor is liable or that attaches to property the debtor holds. In the event that the amount forgiven is $600 or more, the debtor should receive a Form 1099-C, Cancellation of Debt, from the lender. See Form 1099-C and the separate instructions. The debtor may not have to report the entire amount of canceled debt as income as certain exclusions may apply.
taxmap/pubs/p908-007.htm#en_us_publink1000137392

Exclusions(p27)

rule
Don't include a canceled debt in gross income if:
taxmap/pubs/p908-007.htm#en_us_publink1000275149
Order of exclusions.(p27)
If the cancellation of debt occurs in a title 11 bankruptcy case, the bankruptcy exclusion takes precedence over the insolvency exclusion. To the extent that the taxpayer is insolvent, the insolvency exclusion takes precedence over qualified farm debt or qualified real property business indebtedness exclusions.
taxmap/pubs/p908-007.htm#en_us_publink1000137394

Bankruptcy case exclusion.(p27)

rule
A bankruptcy case is a case under title 11 of the United States Code, but only if the debtor is under the jurisdiction of the court and the cancellation of the debt is granted by the court or occurs as a result of a plan approved by the court.
None of the debt canceled in a bankruptcy case is included in the debtor's gross income in the year it was canceled. Instead, certain losses, credits, and basis of property must be reduced by the amount of excluded income (but not below zero). These losses, credits, and basis in property are called tax attributes and are discussed under Reduction of Tax Attributes, later.
taxmap/pubs/p908-007.htm#en_us_publink1000137395

Insolvency exclusion.(p27)

rule
A debtor is insolvent when, and to the extent, the debtor's liabilities exceed the FMV of the assets. Determine the debtor's liabilities and the FMV of the assets immediately before the cancellation of the debtor's debt to determine whether or not the debtor is insolvent and the amount by which the debtor is insolvent.
Exclude from the debtor's gross income debt canceled when the debtor is insolvent, but only up to the amount by which the debtor is insolvent. However, you must use the amount excluded to reduce certain tax attributes, as explained later under Reduction of Tax Attributes.
taxmap/pubs/p908-007.htm#en_us_publink1000137396

Example.(p27)

$4,000 of the Simpson Corporation's liabilities are canceled outside bankruptcy. Immediately before the cancellation, the Simpson Corporation's liabilities totaled $21,000 and the FMV of its assets was $17,500. Because its liabilities were more than its assets, it was insolvent. The amount of the insolvency was $3,500 ($21,000 − $17,500). The corporation may exclude only $3,500 of the $4,000 debt cancellation from income because that is the amount by which it was insolvent. It must also reduce certain tax attributes by the $3,500 of excluded income. The remaining $500 of canceled debt must be included in income.
taxmap/pubs/p908-007.htm#en_us_publink1000137397

Reduction of Tax Attributes(p27)

rule
If a debtor excludes canceled debt from income because it is canceled in a bankruptcy case or during insolvency, he or she must use the excluded amount to reduce certain "tax attributes." Tax attributes include the basis of certain assets and the losses and credits listed later. By reducing the tax attributes, the tax on the canceled debt is partially postponed instead of being entirely forgiven. This prevents an excessive tax benefit from the debt cancellation.
If a separate bankruptcy estate was created, the trustee or debtor-in-possession must reduce the estate's attributes (but not below zero) by the canceled debt. See Attribute carryovers under Bankruptcy Estate Deductions and Credits earlier.
taxmap/pubs/p908-007.htm#en_us_publink1000137398

Order of reduction.(p27)

rule
Generally, use the amount of canceled debt to reduce the tax attributes in the order listed below. However, the debtor may choose to use all or a part of the amount of canceled debt to first reduce the basis of depreciable property before reducing the other tax attributes. This choice is discussed later.
taxmap/pubs/p908-007.htm#en_us_publink1000137399
Net operating loss.(p27)
Reduce any NOL for the tax year in which the debt cancellation takes place, and any NOL carryover to that tax year.
taxmap/pubs/p908-007.htm#en_us_publink1000137400
General business credit carryovers.(p27)
Reduce any carryovers, to or from the tax year of the debt cancellation, of amounts used to determine the general business credit.
taxmap/pubs/p908-007.htm#en_us_publink1000137401
Minimum tax credit.(p28)
Reduce any minimum tax credit that is available as of the beginning of the tax year following the tax year of the debt cancellation.
taxmap/pubs/p908-007.htm#en_us_publink1000137402
Capital losses.(p28)
Reduce any net capital loss for the tax year of the debt cancellation, and any capital loss carryover to that year.
taxmap/pubs/p908-007.htm#en_us_publink1000137403
Basis.(p28)
Reduce the basis of the debtor's property as described under Basis Reduction, later. This reduction applies to the basis of both depreciable and nondepreciable property.
taxmap/pubs/p908-007.htm#en_us_publink1000137404
Passive activity loss and credit carryovers.(p28)
Reduce any passive activity loss or credit carryover from the tax year of the debt cancellation.
taxmap/pubs/p908-007.htm#en_us_publink1000137405
Foreign tax credit.(p28)
Last, reduce any carryover, to or from the tax year of the debt cancellation, of an amount used to determine the foreign tax credit or the Puerto Rico and possession tax credit.
taxmap/pubs/p908-007.htm#en_us_publink1000137406

Amount of reduction.(p28)

rule
Except for the credit carryovers, reduce the tax attributes listed earlier 1 dollar for each dollar of canceled debt that is excluded from income. Reduce the credit carryovers by 331/3 cents for each dollar of canceled debt that is excluded from income.
taxmap/pubs/p908-007.htm#en_us_publink1000137407

Making the reduction.(p28)

rule
Make the required reductions in tax attributes after figuring the tax for the tax year of the debt cancellation. In reducing NOLs and capital losses, first reduce the loss for the tax year of the debt cancellation, and then any loss carryovers to that year in the order of the tax years from which the carryovers arose, starting with the earliest year. Make the reductions of credit carryovers in the order in which the carryovers are taken into account for the tax year of the debt cancellation.
taxmap/pubs/p908-007.htm#en_us_publink1000137408

Individuals under chapter 7 or 11.(p28)

rule
In an individual bankruptcy under chapter 7 or 11 of title 11, the required reduction of tax attributes must be made to the attributes of the bankruptcy estate, a separate taxable entity resulting from the filing of the case. The trustee of the bankruptcy estate must make the choice of whether to reduce the basis of depreciable property first before reducing other tax attributes.
taxmap/pubs/p908-007.htm#en_us_publink1000137409

Basis Reduction(p28)

rule
If any amount of the debt cancellation is used to reduce the basis of assets as discussed under Reduction of Tax Attributes, the following rules apply to the extent indicated.
taxmap/pubs/p908-007.htm#en_us_publink1000137410

When to make the basis reduction.(p28)

rule
Reductions in basis due to debt cancellation are made at the beginning of the tax year following the cancellation. The reduction applies to property held at that time. See Regulations section 1.1017-1 for more information.
taxmap/pubs/p908-007.htm#en_us_publink1000137411

Bankruptcy and insolvency reduction limit.(p28)

rule
The reduction in basis for canceled debt in bankruptcy or in insolvency cannot be more than the total basis of property held immediately after the debt cancellation, minus the total liabilities immediately after the cancellation. This limit does not apply if an election is made to reduce basis before reducing other attributes. This election is discussed later.
taxmap/pubs/p908-007.htm#en_us_publink1000137412

Exempt property under title 11.(p28)

rule
If debt is canceled in a bankruptcy case under title 11 of the United States Code, don't reduce the basis in property that the debtor treats as exempt property under section 522 of title 11.
taxmap/pubs/p908-007.htm#en_us_publink1000137413

Election to reduce basis in depreciable property first.(p28)

rule
The estate, in the case of an individual bankruptcy under chapter 7 or 11, may choose to reduce the basis of depreciable property before reducing any other tax attributes. However, this reduction of the basis of depreciable property cannot be more than the total basis of depreciable property held at the beginning of the tax year following the tax year of the debt cancellation.
Depreciable property means any property subject to depreciation, but only if a reduction of basis will reduce the amount of depreciation or amortization otherwise allowable for the period immediately following the basis reduction. The debtor may choose to treat as depreciable property any real property that is stock in trade or is held primarily for sale to customers in the ordinary course of trade or business. The debtor must generally make this choice on the tax return for the tax year of the debt cancellation, and, once made, the debtor can only revoke it with IRS approval. However, if the debtor establishes reasonable cause, the debtor may make the choice with an amended return or claim for refund or credit.
taxmap/pubs/p908-007.htm#en_us_publink1000137414
Making elections.(p28)
Make the election to reduce the basis of depreciable property before reducing other tax attributes, as well as the election to treat real property inventory as depreciable property, on Form 982.
taxmap/pubs/p908-007.htm#en_us_publink1000137415

Recapture of basis reductions.(p28)

rule
If any basis in property is reduced under these provisions and is later sold or otherwise disposed of at a gain, the part of the gain corresponding to the basis reduction is taxable as ordinary income. Figure the ordinary income part by treating the amount of the basis reduction as a depreciation deduction and by treating any such basis-reduced property that isn't already either IRC section 1245 or IRC section 1250 property as IRC section 1245 property. In the case of IRC section 1250 property, make the determination of what would have been straight line depreciation as though there had been no basis reduction for debt cancellation. IRC sections 1245 and 1250 and the recapture of gain as ordinary income are explained in Publication 544.
taxmap/pubs/p908-007.htm#en_us_publink1000137416

Partnerships(p28)

rule
If a partnership's debt is canceled because of bankruptcy or insolvency, the rules for the exclusion of the canceled amount from gross income and for tax attribute reduction are applied at the individual partner level. Thus, each partner's share of debt cancellation income must be reported on the partner's return unless the partner meets the bankruptcy or insolvency exclusions explained earlier. Then all choices, such as the choices to reduce the basis of depreciable property before reducing other tax attributes, to treat real property inventory as depreciable property, and to end the tax year on the day before filing the bankruptcy case, must be made by the individual partners, not the partnership.
taxmap/pubs/p908-007.htm#en_us_publink1000137417

Depreciable property.(p28)

rule
For purposes of reducing the basis of depreciable property in attribute reduction, a partner treats his or her partnership interest as depreciable property to the extent of the partner's proportionate interest in the partnership's depreciable property. This applies only if the partnership makes a corresponding reduction in the partnership's basis in its depreciable property with respect to the partner.
taxmap/pubs/p908-007.htm#en_us_publink1000137418

Partner's basis in partnership.(p28)

rule
The allocation of an amount of debt cancellation income to a partner results in that partner's basis in the partnership being increased by that amount. At the same time, the reduction in the partner's share of partnership liabilities caused by the debt cancellation results in a deemed distribution, in turn resulting in a reduction of the partner's basis in the partnership. These basis adjustments are separate from any basis reduction under the attribute-reduction rules described earlier.
taxmap/pubs/p908-007.htm#en_us_publink1000137419

Corporations(p28)

rule
Corporations in a bankruptcy proceeding or insolvency generally follow the same rules for debt cancellation and reduction of tax attributes as an individual or individual bankruptcy estate would follow.
taxmap/pubs/p908-007.htm#en_us_publink1000137420

Stock for Debt Exchange(p28)

rule
If a corporation transfers its stock (or if a partnership transfers an interest in the partnership) in satisfaction of indebtedness and the FMV of the stock or interest is less than the indebtedness owed, the corporation or partnership has income to the extent of the difference from the cancellation of indebtedness. The corporation or partnership can exclude all or a portion of the income created by the stock or interest debt transfer if it is in a bankruptcy proceeding or, if not in a bankruptcy proceeding, it can exclude the income to the extent it is insolvent. However, the corporation or partnership must reduce its tax attributes to the extent it has any by the amount of the excluded income.
taxmap/pubs/p908-007.htm#en_us_publink1000137422

Earnings and profits(p28)

rule
The earnings and profits of a corporation don't include income from the discharge of indebtedness to the extent of the amount applied to reduce the basis of the corporation's property as explained earlier. Otherwise, discharge of indebtedness income, including amounts excluded from gross income, increases the earnings and profits of the corporation (or reduces a deficit in earnings and profits).
If there is a deficit in the corporation's earnings and profits and the interest of any shareholder of the corporation is terminated or extinguished in a title 11 or similar case (defined earlier), the deficit must be reduced by an amount equal to the paid-in capital allocable to the shareholder's terminated or extinguished interest.
taxmap/pubs/p908-007.htm#en_us_publink1000137423

S Corporations(p29)

rule
For S corporations, the rules for excluding income from debt cancellation because of bankruptcy or insolvency apply at the corporate level.
taxmap/pubs/p908-007.htm#en_us_publink1000137424

Net operating losses.(p29)

rule
A loss or deduction that is disallowed for the tax year of the debt cancellation because it exceeds the shareholders' basis in the corporation's stock and debt is treated as an NOL for that tax year in making the required reduction of tax attributes for the amount of the canceled debt.
taxmap/pubs/p908-007.htm#en_us_publink1000137425

Tax Attribute Reduction Example(p29)

rule
The sample filled-in Form 982 shown on the next page is based on the following situation.
Tom Smith is in financial difficulty, but he has been able to avoid declaring bankruptcy. In 2018, he reached an agreement with his creditors whereby they agreed to forgive $10,000 of the total that he owed them in return for his setting up a schedule for repayment of the rest of his debts.
Immediately before the debt cancellation, Tom's liabilities totaled $120,000 and the FMV of his assets was $100,000 (his total basis in all these assets was $90,000). At the time of the debt cancellation, he was considered insolvent by $20,000. He can exclude from income the entire $10,000 debt cancellation because it was not more than the amount by which he was insolvent.
Among Tom's assets, the only depreciable asset is a rental condominium with an adjusted basis of $50,000. Of this, $10,000 is allocable to the land, leaving a depreciable basis of $40,000. He has a long-term capital loss carryover to 2018 of $5,000. He also has an NOL of $2,000 and a $3,000 NOL carryover from 2015. He has no other tax attributes arising from the current tax year or carried to this year.
Ordinarily, in applying the $10,000 debt cancellation amount to reduce tax attributes, Tom would first reduce his $2,000 NOL, next, his $3,000 NOL carryover from 2015, and then his $5,000 net capital loss carryover. However, he figures that it is better for him to preserve his loss carryovers for the next tax year.
Tom elects to reduce basis first. He can reduce the depreciable basis of his rental condominium (his only depreciable asset) by $10,000. The tax effect of doing this will be to reduce his depreciation deductions for years following the year of the debt cancellation. However, if he later sells the condominium at a gain, the part of the gain from the basis reduction will be taxable as ordinary income.
Tom must file Form 982, as shown here, with his individual return (Form 1040) for the tax year of the debt discharge. In addition, he must attach a statement describing the debt cancellation transaction and identifying the property to which the basis reduction applies. This statement isn't illustrated.
taxmap/pubs/p908-007.htm#en_us_publink1000151942

Form 982

taxmap/pubs/p908-007.htm#en_us_publink1000151938
taxmap/pubs/p908-007.htm#en_us_publink100084219

How To Get Tax Help(p31)

rule
If you have questions about a tax issue, need help preparing your tax return, or want to download free publications, forms, or instructions, go to IRS.gov and find resources that can help you right away.
taxmap/pubs/p908-007.htm#en_us_publink100017150

Tax reform.(p31)

rule
Major tax reform legislation impacting individuals, businesses, and tax-exempt entities was approved by Congress in the Tax Cuts and Jobs Act on December 22, 2017. Go to IRS.gov/TaxReform for information and updates on how this legislation affects your taxes.
taxmap/pubs/p908-007.htm#en_us_publink100083888

Preparing and filing your tax return.(p31)

rule
Find free options to prepare and file your return on IRS.gov or in your local community if you qualify.
The Volunteer Income Tax Assistance (VITA) program offers free tax help to people who generally make $54,000 or less, persons with disabilities, and limited-English-speaking taxpayers who need help preparing their own tax returns. The Tax Counseling for the Elderly (TCE) program offers free tax help for all taxpayers, particularly those who are 60 years of age and older. TCE volunteers specialize in answering questions about pensions and retirement-related issues unique to seniors.
You can go to IRS.gov to see your options for preparing and filing your return which include the following.
EIC
Getting answers to your tax questions. On IRS.gov get answers to your tax questions anytime, anywhere.
  • Go to IRS.gov/Help for a variety of tools that will help you get answers to some of the most common tax questions.
  • Go to IRS.gov/ITA for the Interactive Tax Assistant, a tool that will ask you questions on a number of tax law topics and provide answers. You can print the entire interview and the final response for your records.
  • Go to IRS.gov/Pub17 to get Pub. 17, Your Federal Income Tax for Individuals, which features details on tax-saving opportunities, recent tax changes, and thousands of interactive links to help you find answers to your questions. View it online in HTML, as a PDF, or download it to your mobile device as an eBook.
  • You may also be able to access tax law information in your electronic filing software.
taxmap/pubs/p908-007.htm#en_us_publink100084197

Getting tax forms and publications.(p31)

rule
Go to IRS.gov/Forms to view, download, or print all of the forms and publications you may need. You can also download and view popular tax publications and instructions (including the 1040 instructions) on mobile devices as an eBook at no charge. Or, you can go to IRS.gov/OrderForms to place an order and have forms mailed to you within 10 business days.
taxmap/pubs/p908-007.htm#en_us_publink100084198

Access your online account (Individual taxpayers only).(p31)

rule
Go to IRS.gov/Account to securely access information about your federal tax account.
taxmap/pubs/p908-007.htm#en_us_publink100084199

Using direct deposit.(p31)

rule
The fastest way to receive a tax refund is to combine direct deposit and IRS e-file. Direct deposit securely and electronically transfers your refund directly into your financial account. Eight in 10 taxpayers use direct deposit to receive their refund. IRS issues more than 90% of refunds in less than 21 days.
taxmap/pubs/p908-007.htm#en_us_publink100084200

Refund timing for returns claiming certain credits.(p31)

rule
The IRS can’t issue refunds before mid-February 2019, for returns that properly claimed the earned income credit (EIC) or the additional child tax credit (ACTC). This applies to the entire refund, not just the portion associated with these credits.
taxmap/pubs/p908-007.htm#en_us_publink100084201

Getting a transcript or copy of a return.(p31)

rule
The quickest way to get a copy of your tax transcript is to go to IRS.gov/Transcripts. Click on either "Get Transcript Online" or "Get Transcript by Mail" to order a copy of your transcript. If you prefer, you can:
taxmap/pubs/p908-007.htm#en_us_publink100084202

Using online tools to help prepare your return.(p31)

rule
Go to IRS.gov/Tools for the following.
taxmap/pubs/p908-007.htm#en_us_publink100084203

Resolving tax-related identity theft issues.(p31)

rule
taxmap/pubs/p908-007.htm#en_us_publink100084204

Checking on the status of your refund.(p31)

rule
taxmap/pubs/p908-007.htm#en_us_publink100084205

Making a tax payment.(p31)

rule
The IRS uses the latest encryption technology to ensure your electronic payments are safe and secure. You can make electronic payments online, by phone, and from a mobile device using the IRS2Go app. Paying electronically is quick, easy, and faster than mailing in a check or money order. Go to IRS.gov/Payments to make a payment using any of the following options.
taxmap/pubs/p908-007.htm#en_us_publink100084206

What if I can’t pay now?(p31)

rule
Go to IRS.gov/Payments for more information about your options.
taxmap/pubs/p908-007.htm#en_us_publink100084207

Checking the status of an amended return.(p31)

rule
Go to IRS.gov/WMAR to track the status of Form 1040X amended returns. Please note that it can take up to 3 weeks from the date you mailed your amended return for it to show up in our system and processing it can take up to 16 weeks.
taxmap/pubs/p908-007.htm#en_us_publink100084208

Understanding an IRS notice or letter.(p32)

rule
Go to IRS.gov/Notices to find additional information about responding to an IRS notice or letter.
taxmap/pubs/p908-007.htm#en_us_publink100084209

Contacting your local IRS office.(p32)

rule
Keep in mind, many questions can be answered on IRS.gov without visiting an IRS Tax Assistance Center (TAC). Go to IRS.gov/LetUsHelp for the topics people ask about most. If you still need help, IRS TACs provide tax help when a tax issue can’t be handled online or by phone. All TACs now provide service by appointment so you’ll know in advance that you can get the service you need without long wait times. Before you visit, go to IRS.gov/TACLocator to find the nearest TAC, check hours, available services, and appointment options. Or, on the IRS2Go app, under the Stay Connected tab, choose the Contact Us option and click on “Local Offices.”
taxmap/pubs/p908-007.htm#en_us_publink100084210

Watching IRS videos.(p32)

rule
The IRS Video portal (IRSvideos.gov) contains video and audio presentations for individuals, small businesses, and tax professionals.
taxmap/pubs/p908-007.htm#en_us_publink100084211

Getting tax information in other languages.(p32)

rule
For taxpayers whose native language isn’t English, we have the following resources available. Taxpayers can find information on IRS.gov in the following languages.
The IRS TACs provide over-the-phone interpreter service in over 170 languages, and the service is available free to taxpayers.