Cancellation of Debt

[Sheryl42]

Received two notices in mail that I have to add this cancellation of debt done by Freedom Debt Relief and Cavalry SPV I LLC to my income taxes as income earned. I took out a loan from my credit union to pay Freedom Debt Relief off quickly their interest rates ridiculous compared to a personal loan from my credit union. I’m still paying on the loan which was more than these documents $10,975.66 versus $14,204.94 personal loan. 
Do I need to amend? Already paying the Federal government  $5,085. 
your help and guidance needed. Thanks, Sheryl

[DeanM15]

If you received a 1099-C, Cancelation of Debt, you will need to amend an already-filed return to add the form to your return. 

From your post, there seems to be a question of whether they actually cancelled the debt or were paid off. Before amending you should go over the numbers, and perhaps call the issuer of the 1099-Cs, and confirm that there was a cancellation of debt. If there was not a cancellation of debt you will need to have corrected 1099-Cs issued with a $0 amount in box 2 at least. 

There are ways to exclude the cancellation of debt from your income. These include Chapter 11 bankruptcy as well as insolvency. If you were insolvent that means that your liabilities exceeded your assets immediately before the cancellation of income (so that it includes the dept on the 1099-C. If you are going to use Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness you will need to work in Forms mode of the Desktop version of Turbotax. You can find the Worksheet for Insolvency on page 6 of Pub 4681. More information is here. 

[Marcia M]

I received a 1099-C for a debt for a single member LLC in 2019.  The LLC had filed for bankruptcy under Chapter 11.  This was for a credit card.  These expenses charged on the credit card were previously deducted against tax in prior years as business expenses on the Schedule C.

  I understand that amounts forgiven under Chapter 11 are non taxable, however there are no  operating loss carry forwards, basis adjustments or other adjustment items to report the change on Part II of Form 982

Reduction of Attributes due to discharge of debt.   Would I file a Form 982 anyway? 

Is the amount on the 1099-C therefore taxable?  or can I still claim non taxable because it was under a Chapter 11 bankruptcy? 

Thank you for any advice you can give.

[RobertG]

Form 982 excludes Debt cancelled in a Title 11 bankruptcy.

Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness) reports the amount of cancelled debt to excluded from taxable income.

Here is how to prepare Form 982 in TurboTax: 

Under these circumstances and in order to file the Form 982, we generally recommend using the CD/Download version of TurboTax Deluxe or a higher edition. If  you are currently using our TurboTax online product, and if you have not paid anything yet, you can easily cancel and change to the desktop version for your return.

Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness) reports the amount of cancelled debt to excluded from taxable income. We'll automatically generate Form 982 if your cancelled debt is due to:

• Cancellation of qualified principal residence indebtedness, aka mortgage debt relief;
• Debt cancelled in a Title 11 bankruptcy;
• Debt cancelled during insolvency (the amount exceeding your assets);
• Cancellation of qualified farm or real property indebtedness.

In addition, you should have a 1099-C to report the amount of cancelled debt.

In order to the switch from online to CD/download. please see the following link: https://ttlc.intuit.com/questions/1901476-how-do-i-switch-from-turbotax-online-to-the-turbotax-softw...

Once you have done the above you can access the forms mode of your desktop program using these steps:

To switch to Forms Mode, open your return, and then click the Forms icon in the upper right corner of your screen (or choose Forms from the View menu at top).

The Federal Information Worksheet will display and all the forms in your return will be listed on the left side. Then click on Open Form and type in the search box : Form 982.

To make sure its excluded within your return, you will need to fill out the following forms:

• Form 1099-C (Cancellation of Debt), fill out accordingly
• Form 982, you will need to indicate the reason for the discharge within Part 1 General information and you will need to include an amount within Part II Reduction of Tax Attributes (accordingly to the reason)
• Canceled Debt Worksheet (fill out the Part accordingly to your reason or exclusion)
  • Part VIII Exclusion for Insolvency (must fill out the Statement of Insolvency)
• Then check Form 1040, look at Line 21 Other Income, should be 0.

This answer is from NicoleU

[Marcia M]

Thank you so much,  but I am looking at Form 982 Part II and none of those situation applies.  The debt was incurred by charging ordinary expense items on the Schedule C for the LLC that was operating in prior years. So does this mean that because I cannot fill out any of the lines on Part II that it will be taxable?

Thank you for your help.  This is alot of money and I don't want to pay tax on it.

[AmyC]

Since you purchased items for your business and wrote those items off in prior years to reduce your income, it only makes sense, that you would now have to pay the taxes on this income. It is not money you actually spent from your pocket -until now. 

@Marcia M

[Marcia M]

Thank you so much.  I agree it makes sense that because the expenses were deducted in a prior year the amount would be taxable.  However, the instructions specifically say if the debt was cancelled in a Chapter 11 Bankruptcy that it is excluded and therefore non taxable.  Would you be able to help me find where it explains that business expenses previously deducted would make this to be taxable?

I really appreciate your help, but you sound so knowledgeable about this topic.

[RobertG]

Part II of Form 982 refers to a reduction of tax attributes. 

This means that when you exclude a cancelled debt from income you are not allowed to get an additional tax benefit from losses attributable to the debt.

In your case that would not apply unless you were planning to carryover a net operating loss created by your business.

The instructions for Form 982 part II say:

"If you check any of the boxes on lines 1a through 1c, you can elect, by completing line 5, to apply all or a part of the debt discharge amount to ..."

Just don't check any boxes in Part II.  Just complete Part I.

[Marcia M]

Thank you.  However, we were not planning to carry over a net operating loss... These expenses were deducted against income in prior years.

So are you indicating that it would or would not be includable in income?

Thank you for your guidance again.

[RobertG]

Yes, if the debt was cancelled in a Chapter 11 Bankruptcy it can be excluded and is therefore non taxable.

@Marcia M