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Form 1099-C - Cancellation of Debt / Form 982 - Reduction of Tax Attributes

What Is Cancellation of Debt? 

Loan proceeds from a loan taken out by a taxpayer are not part of the taxpayer’s income. They are a debt which the taxpayer must pay back to the lender. In the event that the lender forfeits or cancels the debt, the forgiven amount will be regarded as taxable income depending on the situation since the taxpayer is no longer obligated to repay the lender. Normally, the lender is required to report the cancelled debt amount to the IRS on Form 1099-C. 


The following is a simple example. When you borrow $20,000 but fail to fully pay back the loan and the lender has no means to collect the remainder, then there will be a cancellation of debt of the remainder which is normally income that is subject to tax. 


IRS: Home Foreclosure and Debt Cancellation


Generally, cancellation of a debt leads to it being taxable income. There are however some exceptions to this rule. These exceptions include the bankruptcy and insolvency of the taxpayer and the debt cancellation being qualified principal residence indebtedness. In the absence of any of the exceptions, the cancelled debt becomes income in the year it is cancelled. 


Taxable cancelled debt must be reported as ordinary income. The various forms to be used for the reporting are: 


The following are some of the most common circumstances in which cancelled debt income is not to be taxed: 


  • Gifts and bequests. 
  • Insolvency of the taxpayer. That is, when the total liabilities of the taxpayer are more than the fair market value of the assets of the taxpayer, just before the debt is cancelled. 
  • In the event that the payment of the liability will give rise to a deduction to a cash basis taxpayer. 
  • Loans to students where some debts are cancelled in exchange for public service. 
  • Loan cancellation as part of a  project that helps in the provision of health services in certain areas. 
  • When the price is reduced after the purchase. In the event that a seller lowers the debt owed for purchase of a property, the reduction is considered purchase price adjustment that reduces the basis. 
  • The cancellation is done at a time that the taxpayer is insolvent, to the extent to which the taxpayer is insolvent. 
  • Pay-for-Performance Success Payments made under the Home Affordable Modification Program. The principal is reduced by these payments. 
  • Student loan granted to a student because of death or total permanent disability of the student. 
  • Qualified Farm debt that is owed to a qualified person
  • Qualified real property business debt 
  • Discharge of some indebtedness of a qualified person due to the Midwestern disasters. Check out Publication 4492-B. 

To help you determine whether cancelled debt is taxable, check out the Interactive Tax Assistant on the IRS website. The ITA will take you through questions, providing answers to tax law questions. 


To enter Form 1099-C in the Taxx Savage Pro in Desktop: 


  • Go to the Main Menu of the tax return 
  • Proceed to the Income Menu 
  • Select Other Income (W-2G, 2555)
  • Go to the Cancellation of Debt (Form 1099-C)
  • Then go to Form 1099-C Cancellation of Debt 

Discharged debt is regarded as taxable income. There are however certain situations in which this amount is excused from taxable income. The exclusion from income is reported by filing Form 982 alongside the return. 


The Interactive Tax Assistant is an IRS tool used to determine whether cancelled debt on the personal residence of the taxpayer is taxable. 


To enter Form 982 in Taxx Savage Pro: 


  • Go to the Main Menu of the tax return 
  • Select Income Menu 
  • Then Other Menu (W-2G. 2555) 
  • Proceed too Cancellation of Debt (1099-C) 
  • Then select Form 982 - Reduction of Tax Attributes 

To access cancelled debt that has been cancelled and is to pass through Form K- (Form 1065) and is excluded in line with IRC section 108(1): 


  • Go to the Main Menu of the tax return 
  • Select income Menu 
  • Then Other Income (W-2G, 2555) 
  • Proceed to Cancellation of Debt (1099-C) 
  • Then select Protective Section 108(i) Election - Select YES then explain 


Note: This is not tax advice. It is a guide on how to enter cancellation of debt into the Taxx Savage Pro program. 


Additional Information:

Publication 544, Sales and Dispositions of Other Assets

Publication 908, Bankruptcy Tax Guide

Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments