"We first selected Gary Bode because of his familiarity with a creative financing scheme for our new small business. During our time with Gary, his insights have helped us better structure our small businesses, save money, and learn to be better small business managers. When it comes to small business accounting, a little hand-holding goes a long way."—Justin and Joelle LeBlancSometimes there’s more to Form 1099-C cancelled debt than just excluding it from taxable income. (910) 399-2705.
As a Form 1099-C CPA I’m still amazed by the variations of cancelled debt I see. Sometimes two or more folks receive the same Form 1099-C. So, before I explain the tax rules for cancellation of debt to these Clients, they sometimes assume the bank is doing something sneaky. But this is a joint and severally liable discharge of indebtedness scenario that offers some tax strategy opportunity on Form 982, Reduction of Tax Attributes.
Joint and severally liable cancelled debt
If a loan has more than one guarantor, the bank may hold each person liable for the entire debt – ouch! So if your partner disappears you’re still on the hook for 100% of the loan.
Tax rules for cancellation of debt
The IRS wants to tax the amount in Box 2 of Form 1099-C. But with joint and severally liable cancelled debt, the Folks receiving the same 1099-C(s) can decide how that cancelled debt gets divided between the parties. So, cancellation of debt tax reporting could exclude all cancelled debt by optimizing allocation. Read below for more on this scenario.
There are more consequences than just excluding Form 1099-C cancelled debt from taxable income with Form 982
The Reduction of Tax Attributes section of Form 982 affects the tax consequences of cancelled debt. Sometimes the effect is delayed and everything looks great on the 2013 tax return. Here’s an example of delayed consequences with Form 982. Say A and B both receive the same 2013 1099-C showing $10,000 of debt. Your cancelled debt CPA excludes all the discharged debt on Form 982 by applying $9,000 to A and $1,000 to B. But A has to reduce the basis of a rental real estate property he owns by the $9,000 of cancelled debt. Again there’s no real consequence in 2013. But when he sells the rental property, A incurs $9,000 more taxable gain or $9,000 less loss on Form 4797 for, perhaps, a $3,000 adverse delayed tax effect.
I’m a cancelled debt CPA with a virtual office. Call for a free Form 1099-C and Form 982 cancelled debt consult. (910) 399-2705.
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