Financial Glossary
Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness)
Form 982 is the IRS form used to report the exclusion of canceled or forgiven debt from taxable income and to reduce certain tax attributes as a result. When a lender cancels debt, the forgiven amount is generally treated as taxable income, but Form 982 lets a taxpayer exclude it if they qualify under an exception such as insolvency, bankruptcy, or qualified real property business debt. In exchange for excluding the income, the taxpayer reduces tax attributes like net operating losses or the basis of assets.
Problem & Application
Real estate investors and business owners who renegotiate or settle debt can be surprised by a cancellation-of-debt notice and an unexpected tax bill. Form 982 is how a taxpayer who was insolvent at the time of the cancellation, or whose debt was tied to business real property, may legitimately keep that forgiven amount out of taxable income. Because eligibility and the required attribute reduction are technical, the analysis should be reviewed against current IRS guidance for the year of the cancellation.
In Short
Form 982 can turn a taxable debt-forgiveness event into a non-taxable one when you qualify, but the exclusion comes with a required tradeoff in your tax attributes.