1040-US: Order for reducing tax attributes for Form 982

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Question

Is there a particular order in which the tax attributes must be reduced?

Answer

Tax attributes must be reduced in a particular order. The order is dependent upon why the canceled debt is being excluded from income. Use Screen 982, located in the Other With Return folder, to report the reduced attributes on Form 982. See the Form 982 instructions regarding the ordering rules that must be followed.

Following is additional information regarding the reduction of tax attributes.

Tax attributes - If the canceled debt is excluded due to bankruptcy or insolvency, the excluded debt must be used to reduce the tax attributes in the following order unless electing to reduce the basis of depreciable property first. Tax attributes are reduced after determining the income tax liability for the tax year. See IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments, for additional information.

  1. Net operating loss - To report NOL reduction on Form 982, line 6, enter the excluded amount(s) in the Net operating loss and carryover and Net operating loss and carryover - AMT fields in Screen 982, located in the Other With Return folder. The reduction will also be reported on the NOL Worksheet 2.
  2. General business credit carryover - To report the general business credit carryover reduction on Form 982, line 7, enter the total amount excluded from income in the General business credit carryover field in Screen 982, located in the Other With Return folder. UltraTax CS reports 33 1/3 percent of the amount entered in Screen 982.
  3. Minimum tax credit - To report the minimum tax credit reduction on Form 982, line 8, enter the total amount excluded from income in the Minimum tax credit field in Screen 982, located in the Other With Return folder. UltraTax CS reports 33 1/3 percent of the amount entered in Screen 982. The reduction is also reported on Form 8801, Page 2.
  4. Capital loss - To report the excluded income as applied to reduce net capital loss on Form 982, line 9, use the applicable capital loss carryover fields in Screen 982, located in the Other With Return folder. The following capital loss carryover fields are available.

    • Short-term capital loss and capital loss carryover
    • Short-term capital loss and capital loss carryover - AMT
    • Long-term capital loss and capital loss carryover
    • Long-term capital loss and capital loss carryover - AMT
  5. Basis - IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments, describes that basis reduction must occur in the following order.

    Note: Basis needs to be adjusted as of the first day of the following tax year in which the tax attribute was reduced. This will require a manual adjustment to assets entered in the asset module, any beginning inventory proforma'd to the Screen C , Cost of Good Sold section or Screen F, Accrual Income Items section, or inventory information imported from Creative Solutions Accounting. A client note could be created and proforma'd to the following year as a reminder to adjust applicable basis in the following tax year. For more information about client notes, see Attaching a client note.

    1. Real property used in trade or business (except inventory) or held for investment that secured the canceled debt - To report the excluded income on Form 982, line 4 as applied to reduce the basis of depreciable real property, use the Qualified real property business indebtedness applied to reduce basis of depreciable real property field in Screen 982, located in the Other With Return folder.
    2. Personal property used in trade or business (except inventory and accounts and notes payable) or held for investment that secured the canceled debt - To report the excluded income on Form 982, line 10a as applied to reduce the basis of nondepreciable and depreciable property, use the Basis of nondepreciable and depreciable property if not reduced for section 108(b)(5) election field in Screen 982, located in the Other With Return folder.
    3. Other property (except inventory, accounts and notes payable, and real property held primarily for sale to customers) used in the taxpayer's trade or business or held for investment - To report the excluded income on Form 982, line 10a as applied to reduce the basis of nondepreciable and depreciable property, use the Basis of nondepreciable and depreciable property if not reduced for section 108(b)(5) election field in Screen 982, located in the Other With Return folder.
    4. Inventory, accounts and notes receivable, and real property held primarily for sale to customers - To report the excluded income on Form 982, line 10a as applied to reduce the basis of nondepreciable and depreciable property, use the Basis of nondepreciable and depreciable property if not reduced for section 108(b)(5) election field in Screen 982, located in the Other With Return folder.
    5. Personal use property.
  6. Passive activity loss and credit carryovers - To report the reduction of tax attributes as applied to reduce passive activity loss and credit carryovers on Form 982, line 12, enter the total amount excluded from income in the applicable passive activity fields in Screen 982, located in the Other With Return folder. UltraTax CS reports 33 1/3 percent of the amount entered in Screen 982.

    Note: Passive activity loss and credit carryovers will need to be manually adjusted for the reduction in tax attribute by overriding the Suspended Losses to Next Year column on the applicable Passive Activity Deduction Worksheet. The reduced carryover amount proformas to the following tax year.

    The following passive activity fields are available.

    • Passive activity loss
    • Passive activity loss - AMT
    • Passive activity credit carryovers
  7. Foreign tax credit - To report the reduction of tax attributes as applied to reduce foreign tax credit carryover on Form 982, line 13, enter the total amount excluded from income on the applicable foreign tax credit carryover fields in Screen 982, located in the Other With Return folder. UltraTax CS reports 33 1/3 percent of the amount entered on Screen 982.

    Note: Foreign tax credits and credit carryovers will need to be manually adjusted for the reduction in tax attribute by overriding the Unused Foreign Tax (+) or Excess Limit (-) columns on Screen 1116CO. The reduced carryover amount will proforma to the following tax year.

    The following passive activity fields are available.

    • Foreign tax credit carryover
    • Foreign tax credit carryover - AMT

If canceled debt was excluded from income under both the insolvency exclusion and the exclusion for qualified farm indebtedness, the tax attributes must be reduced by the amount excluded under the insolvency exclusion before applying the exclusion for canceled qualified farm indebtedness. To report the excluded amount as applied to qualified farm indebtedness, enter the excluded amount in the applicable fields in Screen 982, located in the Other With Return folder. The following qualified farm indebtedness fields are available.

  • Qualified farm indebtedness, applied to reduce basis of Depreciable property
  • Qualified farm indebtedness, applied to reduce basis Land
  • Qualified farm indebtedness, applied to reduce basis Other property

If electing to reduce the basis of qualified property, do so in the following order.

  1. Depreciable property
  2. Land used or held in the taxpayer's farming business
  3. Other qualified property

Note: Basis will need to be manually adjusted as of the first day of the following tax year in which the tax attribute was reduced for assets entered in the asset module.

Related topic: Form 982 - Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) FAQs (1040)

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