1040-US: Calculation of canceled debt to be included in income

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Question

How does the amount of canceled debt to be included in income calculate, and where is that income reported?

Answer

UltraTax CS reduces the amount of canceled debt in box 2 (on Screen 1099C) by the following:

  • Only interest that would not be deductible if paid should be included in income as canceled debt. If you enter X in the Deductible field in box 3, the amount of canceled debt in box 2 automatically reduces by the amount in box 3.
  • If you enter X in the Exclude 100% of canceled debt from income field in Screen 1099C, 100 percent of the amount in box 2 will be excluded from income.
  • If the Exclude 100% of canceled debt from income field is blank, UltraTax CS will treat the amount in the Box 2 amount excluded from gross income, if not 100% field as the excluded amount. If the amount in this field exceeds the amount in box 2, UltraTax CS defaults to excluding the entire amount of canceled debt from income.

UltraTax CS produces a Cancellation of Debt Worksheet to show how the net amount of canceled debt included in income was calculated. The worksheet also reports the exception or exclusion to the canceled debt to be excluded from income.

Canceled debt income is reported on the form or schedule selected in the Form/Schedule field in Screen 1099C. The following table lists where the amount is reported on the applicable form or schedule.

Form/Schedule Line
1040/Blank line 21 (Schedule 1), Other income
Schedule C line 6, Other income
Schedule E, Page 1 line 3, Rents received or line 4, Royalties received
Schedule F line 8, Other income
Form 4835 line 6, Other income

Note: If there are multiple units of Screen 1099C, the total amount is reported on the applicable form or schedule. The Cancellation of Debt Worksheet details each 1099-C on a per-activity basis and how the total amount is calculated.

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