If you've experienced a bankruptcy, a repossession or other discharge of debt, you've probably also been made aware of a requirement by the IRS to include any amount of debt that has been discharged in your gross income. This requirement applies not just to individuals, but also to business partnerships that have experienced a discharge of debt. If you file a Schedule K, you must report your income or loss on Form 1065. One section of the form has a provision for the cancellation of debt.
Download Form 1065. See Resources for the document link.
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Enter Code E, Cancellation of Debt, in box 11, "Other Income." According to the IRS, this amount is usually included in the your gross income (Form 1040, line 21). Under Section 108(b)(5), you can elect to apply any portion of the "reduction of the basis of depreciable property."
Complete Form 982 (See Resources) to determine the amount to put in Code E and whether your situation is applicable. The form was created to help those who are eligible for the Emergency Economic Stabilization Act of 2008, which includes a qualified principal residence indebtedness discharge between 2006 and 2013.
Send the forms in to the tax service center for your area.
Set aside adequate time for filling out these forms. The IRS estimates that completing Form 982 requires more than two hours.