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Form 982 CPA discusses Cancelled Debt with Partnerships | Form 1065 instructions | Form 1065 U.S. Return of Partnership Income

Cancelled Debt CPA Form 1065 Partnerships Form 1099-C

Partnerships receive Form 1099-C(s) too. If you have a problem with the Form 1065 instructions, or don’t have local CPA well versed in Partnership cancelled debt, consider calling me for a free consult. (910) 399-2705.

Partnerships incur cancelled debt: Form 1099-C, Cancellation of Debt, isn’t just for individuals. Dealing with cancelled debt on Form 1065, U.S. Return of Partnership Income, can be tricky. The Form 1065 instructions aren’t all that great. Sometimes there’s too much information. Other times you have to integrate the Form 1065 instructions with other IRS issues like, say, depreciation

Essentially Box 2 of Form 1099-C flows into the Partner’s Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc., which then flows automatically to Line 21 of Form 1040 as taxable income. The main wrinkle is how much cancelled debt goes to each Partner. Partnerships have good flexibility with allocating who gets what. Sometimes that helps with tax positioning.

Form 1099-C, Cancellation of Debt, and Form 982, Reduction of Tax Attributes

The Partner then deals with the amount of cancelled debt on Schedule K-1 just as though a Form 1099-C got issued to them personally. Cancelled debt escapes tax on the Partnership’s Form 1065. But then you’re in the personal side of cancelled debt. We get a lot of contact from other tax preparers. You’ll see CPA comments on some posts and even a testimonial. So my perception is that lots of Form 982 confusion exists despite the Form 1065 instructions.

Good news? There are dozens of posts on personal cancelled debt on this website.

Partly because of the Recession, most Partnership cancelled debt is from rental property short sales, rental property foreclosures, etc. Here are the main issues on Form 1065, U.S. Return of Partnership Income:

  • The last Form 8825, Rental Real Estate Income and Expenses of a Partnership or an S Corporation.
  • The “sale” of the rental real estate and subsequent gain or loss to the Partnership. Reported on Form 4797. You’ll love the Form 4797 instructions – lol.
  • Prior disallowed losses. I see returns where thousands of legitimate dollar tax deduction go unclaimed in the year of sale.
  • Partnership cancelled debt.
  • I look at the purchase and sales HUDs. Why? Partnerships sometime don’t claim buyer and/or selling expenses.

Our virtual office means distance isn’t a factor. If you don’t have a local CPA experienced in Partnership and personal debt cancellation tax reporting, and you like what you read, consider calling us for a free consult. (910) 399-2705.

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8 comments to Form 982 CPA discusses Cancelled Debt with Partnerships | Form 1065 instructions | Form 1065 U.S. Return of Partnership Income

  • Truman John

    Hi, He’s a different angle on Partnership debt forgiveness. I bought into a partnership with a 70K loan from the Professional Corp to purchase the shares. Half way through payment of the loan I decided to walk away from the partnership for various reasons. I gave up the shares I had received for free and the partnership forgave the rest of the loan. Do they need to give me a 1099-C for the 35K of the loan forgiven? Are taxes owed on the forgiven portion? I have had two CPA give contradictory information so far and would like a tie breaker.

    Cheers,
    Partnership Breakup

  • Noelle Khalil

    would love to know on a partnership level, when a bank issues a 1099C for a debt that was cancelled for Real property, rental business and the FMV of assets is below the debt. i.e
    on the balance sheet BV of asset is 3,000,000 loan value 2,700,000 refi with another lender and the first lender 1099c of 900,000. the FMV based on bank appraisal was 1,700,000.
    I am inclined to prepare the 982 with real property indebtedness exclusion. and no basis adjustment to property.
    What is your thoughts I greatly appreciate it.
    thanks
    nk

  • Dan M

    Can I use prior year passive losses to offset current year COD?

  • Joe W

    I have cancelled debt at the partnership level which I believe is correctly treated as recourse debt. The loan is on real property and is recourse to the partnership although it is non-recourse to the partners due to LLC protections. As such, the cancellation of debt produces a significant amount of COD income. Ordinarily, I would have adopted an insolvency position for the Taxpayer as the debt involved a highly underwater property and the COD income could have been eliminated under the insolvency rules. However, it would seem that the Taxpayer cannot claim insolvency based on the debts of the partnership as they are not personally liable for these debts. Is this a correct understanding of the insolvency rules?

    • Why didn’t your cancelled debt CPA invoke qualified business debt and/or insolvency at the partnerships level? Sound like some cancelled debt could have been reduced, ay least if I understand the situation correctly.

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