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Gary Bode, CPA is a Master's Degreed, nation wide accountant offering tax and business services. Member of AICPA and NCACPA. Our virtual office provides excellent service to long distance and international clients. Call (910) 399-2705 for a free phone consult.

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Client Testimonials

I used Gary’s services to file my 2012 income tax return. This was my first year having an accountant do my return, as I have always done it myself using TurboTax. However, this year I had cancelled debt from my old primary residence which I was forced to convert to a rental property after relocating out of state.

While it didn’t cost me anything to do the short sale, the income tax consequence from the cancelled debt, roughly $50,000 in my case, was enough to move me from the 15% tax bracket to the 25% tax bracket.  Needless to say, I was concerned about that.

Finances were already tight and my husband and I are expecting our first child this fall. So the possibility of owing income tax was stressing me out. However, Gary was great at relieving my fears.

He is extremely knowledgeable, answered all my questions and was very thorough. I knew I was in good hands. He kept in constant contact with me throughout the process, keeping me updated on the progress of my return and letting me know what paperwork he needed to complete my filing.

In my mind, best case scenario would have been to not owe any taxes. Second best would be to only owe a little. Well, you can imagine my surprise and delight when Gary told me I was actually due a refund of a little over $2,700.00!

To top it all off, I found Gary’s fee for service to be fair, competitive and affordable; especially given the complexity of this type of return. I am so glad I did not try and go it alone this year. I am extremely pleased with Gary’s service and would recommend him highly to anyone, in fact I already have. If you have cancelled debt from a short sale or foreclosure, don’t freak out. Take a deep breath and call or email Gary. I am grateful I did.

Angie Falke of Holiday, FL

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Even though Gary enjoys helping colleagues, we no longer provide free consults to other tax preparers. He's happy to consult on an hourly billing basis if our schedule allows.

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Discharge of Indebtedness CPA discusses the tax rules for reporting cancellation of debt | Form 1099-C | Form 982

tax rules for cancellation of debt CPA

IRS debt cancellation rules look complex at first. Try narrowing your research scope. Lots of  IRS info doesn’t apply to you. Or call us  for a free consult on Form 982. (910) 399-2705.

Cancelled debt CPAs understand the tax rules for reporting cancellation of debt. But most Folks who call me don’t. Plus they’re often nervous because the potential tax due on Form 1099-C is roughly 25-30% of the amount in Box 2. Yikes. And they’re intimidated by the Form 982 instructions and IRS Publication 4681.

So I’ll present  a primer on cancelled debt and discuss the most frequent questions I’m asked about Form 1099-C, Cancellation of Debt, and, Form 982, Reduction of Tax Attributes.

The Form 982 instructions and IRS Publication 4681 cover more tax reporting than you need

Like most IRS tax forms, Form 982, Reduction of Tax Attributes, covers a variety of canceled debt circumstances. That means most of the IRS rules don’t apply to your specific situation. One client defined the terminology used in IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, as IRS double speak. Cute but true.

What is Form 1099-C, Cancellation of Debt?

It’s a form that reports a lender writing off some or all of your debt. You get a copy. The IRS gets a copy. Generally speaking, the amount of cancelled debt in Box 2 of Form 1099-C becomes taxable income on your business and/or personal income tax returns unless you can exclude it through one or more of the Form 982 provisions.

Does all Discharge of Indebtedness taxable?

No there are exceptions. Cancelled debt via a gift isn’t taxable (but do the research to ensure this exception applies to you). But, if you receive a IRS Form 1099-C, Cancellation of Debt, it’s almost always taxable.

IRS Insolvency on Form 982

Folks call me the Insolvency CPA because one of my posts ranked well in Google. But Insolvency is only one exclusion on Form 982. Sometimes you can use multiple exclusions.

Types of situations that generate Form 1099-C, Cancellation of Debt

  • Car repossession.
  • Primary residence foreclosures.
  • Primary residence loan modifications.
  • Primary residence short sales.
  • Rental property foreclosures.
  • Rental property loan modifications.
  • Rental property short sales.
  • Settling credit card debt for less than the full amount due.
  • Student loan debt. For example the lender’s will write off the student loan if you become disabled. But you still have to pay the taxes on it.

Does Form 1099-C mean the bank can’t still try to collect on my debt?

Sometimes they can still try to collect from you.

I didn’t get a Form 1099-C

Form 1099-C issuance seems capricious. But I’ve had multiple cases where the IRS got their copy of Form 1099-C and the Client didn’t. Probably because of a bad address issue. They called me after receiving the infamous IRS Notice CP2000 “proposing” they pay tax on the entire amount in Box 2. I’d check with the IRS if you expected a Form 1099-C. Amending a prior return to include Form 982, Reduction of Tax Attributes, is a common scenario.

“There’s not always a free ride with the discharge of indebtedness tax reporting rules. Sometimes Form 982 just delays taxes until you sell other property. Please read below for an example. “
– Gary Bode, discharge of indebtedness CPA

What’s the Reduction of Tax Attributes section of Form 982?

Let’s say the Bank adjusted your mortgage debt with a loan modification. The first hurdle, excluding the $500,000 from taxable income on Form 982, is straight forward. But Form 982 requires you reduce the basis of your assets. That means you would incur more taxable gain if you sell them.

Here’s the non Form 982 sale scenario. You paid $1,500,000 for the home. So if sold it for $2,000,000 there would be a $500,000 capital gain. Since there’s a primary capital gain exclusion for a primary residence you have no tax liability for the $500,000. Ever. A truly free ride.

Here’s the sales scenario with the Form 982. Your basis (purchase price) of home drops to $1M ($1,500,000 purchase price less the $500,000 of tax attribute reduction from Form 982. You sell it eventually for the same $2M. You have $1M of gain. Less the $500,000 primary home capital gains exclusion equals $500,000. Ouch you’re paying capital gains on the $500,000 you avoided initially with Form 982.

Moral of the story:

  • Planning can sometimes make Form 982 a free ride without raising IRS red flags.
  • Keep track of you your reduced basis and factor the tax in when you plan to sell the Form 982 affected asset.

Our virtual office can serve you regardless of location

So if you like what you read and need a Discharge of Indebtedness CPA call us for a free consult. (910) 399-2705.

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