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Reduction of tax Attributes CPA discusses Form 982 for cancelled debt

Reduction of tax attributes cap. Form 982 reduction of tax attributes. Cancelled debt cpa. Form 982 instructions Publication 4681.

How can you tell if you have a good cancelled debt CPA? S/he will discuss reduction of tax attributes with you and how that impacts the current tax return and future tax returns. Need a Form 982 CPA consult. Call me. (910) 399-2705.

Reduction of tax attributes CPAs are hard to find. Or that’s what Clients tell me. Probably because a local CPA doesn’t get as many cancelled debt and Form 982 tax cases as I do. So, making the time to learn the cancelled debt tax reporting regulations not profitable. Lots of tax preparers are scared of cancelled debt tax returns because of bad press from the IRS at the beginning of the Recession. But after 40 million Form 1099-Cs or so my guess is the IRS now sees cancelled debt as routine with little or no attached stigma. Honestly, when I was a brick and mortar CPA we never saw a single cancelled debt tax case and certainly did not have a dedicated reduction of tax attributes CPA.

I’m discussing personal cancelled debt here. But I handle S Corporation cancelled debt and Partnership cancelled debt as well.

FAQs about cancelled debt in general

  • Example of cancelled debt:
    • You had a loan modification on the mortgage of your rental property.
    • The amount of mortgage debt forgiven is cancelled debt.
  • Cancelled debt is reported to you and the IRS via Form 1099-C, Cancellation of Debt.
  • The amount of Box 2 of Form 1099-C becomes taxable debt on Line 21 of Form 1040.
  • The only way to battle cancelled debt and keep it from becoming taxable income is using Form 982, Reduction of Tax Attributes.
  • Form 982 has multiple exclusions on it.
    • For example you would use IRS insolvency on Form 982 to avoid paying taxes on credit card cancelled debt.

“Your reduction of tax Attributes CPA should explain the future tax consequences of using Form 982. The reduction of tax attributes can be nothing, minor, contained to the current return and/or affect future tax returns.”
– Gary Bode, reduction of tax attributes CPA

State Returns

States vary and some no longer honor any federal exclusion on Form 982.

What is a tax attribute?

Honestly, I have a Master’s degree in accountancy and I’ve never seen that term used outside of cancelled debt. But I can give you some examples. It’s not only confusing, and there is a specific order for reducing the tax attributes. Any reduction of tax attributes CPA will tell you to forget the Form 982 instructions and read Form 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. The IRS Form 1099-C instructions aren’t written for the taxpayer, they’re for the banks.

  • You have a net operating loss flowing into your 2017 cancelled debt tax return from a bad stock market year in, say, 2014.
    • The net operating loss is a tax attribute.
  • You have two rental properties. One is in foreclosure, so you’re dealing with rental property cancelled debt in 2017. The basis (what you paid) of the second rental property is a tax attribute.
    • You may need to lower the purchase price of the remaining rental property. I know that sounds odd.
    • But if you’re able to write of $50,000 of cancelled debt in 2017, the purchase price of the remaining rental property is $50,000 lower.
    • That means when you sell the second rental property the IRS gets another chance to tax that $50,000 as a capital gain or decrease your loss on the property.

That’s why your reduction of tax attributes CPA wants to see back tax returns especially with rental property cancelled debt from rental property foreclosures, rental property short sale, etc.

Examples of reduction of tax attributes for cancelled debt tax reporting regulations

The IRS uses three calculations to decide if you need to reduce your tax attributes. Form 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments gives a few examples of that.

“Form 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, is well written. It sometimes assumes you know about other tax issues involved. It uses a strange technical writing style. It’s full of IRS jargon. But read it first. Then call a cancelled debt CPA if it’s beyond your comfort level. I’m sure lots of Folks self prepare a cancelled debt tax return”
– Gary Bode, reduction of tax attributes CPA

Net operating Loss – example of a tax attribute for Form 982

OK you lost $25,000 in the stock market in 2015. You can only deduct $3,000 a year if you don’t have capital gains to offset it. On the 2017 tax return your reduction of tax attributes CPA got rid of $7,000 of cancelled debt for you by using Form 982. The capital carryover loss was $19,000 at the end of 2016; $25,000 less $3,000 claimed in 2015 less $3,000 claimed in 2016. You lose $7,000 of that capital loss at the start of 2017 as required by the reduction of tax attributes component of Form 982. So you can still use $3,000 of NOL on 2017 but you only have $9,000 of loss to carry forward; 25-3-3-3-7. So it affects how long you can carry that capital loss forward. In this case it’s over three years.

2nd rental property – another tax attribute example.

OK, you have the same $7,000 1099-C in 2017. Again your reduction of tax attributes CPA got rid of all of it. Now let’s say you have no NOL being carried forward. The IRS will lower the purchase price of that 2nd rental property. So when you sell the second rental property you pay capital gains on the additional $7,000 for Form 1099-C. So Form 982 is sometimes just a tax deferral.

Do you need a reduction of tax attributes CPA?

Maybe. Read the Form 982 instructions and Form 4681Canceled Debts, Foreclosures, Repossessions, and Abandonments. I’m sure lots of Folks self prepare cancelled debt tax returns. We only see the ones where the IRS didn’t agree with the taxpayer.

Don’t use tax chains for cancelled debt tax returns.

Tax software is problematic. Even if it supports cancelled debt it may not do so automatically; you probably need a manual workaround that requires you knowing what the IRS Forms should be.

The down side of self tax preparation? The amount of potential additional tax due can be high, like I mean more than $80,000 sometimes. The cancelled debt tax reporting regulations are complex and aren’t covered well, in my opinion, in the Form 982 instructions. Some Clients tell me CPA signature decreases the chance of an audit but I’ve never read or heard that from the IRS. Soft issues factor in as well like frustration and sleepless nights.

I’m, a reduction of tax attributes CPA that offers a free phone consult. I really do try to help. But sometimes the more you explain things to a client the more they realize it’s not a DIY project.

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