taxta1k
Using Forms 8582 and 982 to Report Suspended Passive Losses and Discharge of Indebtedness
II)' Kr/ly l'riro
Gcncr:tllya discharge of indebtedness lakes place when ;1 creditor reduces, ill whole or in part, the arnounr owed, which rcsuhs in gross income for rhe debtor unless an exception applies.
debt income is only reponed on Form 1099-C. 'rherefore, in a scenario similar to that descri bed above , the debtor lllay receive either a 1099-A :!nd 1099-C or JUSt a 1099-C. Deb!" discharge income resulting from debt allocated to passive activilY expendimres (e.g., when a remal property's mortgage balance is reduced by a lender) is p:!ssive income and can be ofE~et by passive losses. Debt no! allocated to passive ;Jceivity expenditure.~ is nor considered passive income (Rev. Ru1. 92-92). Therefore, if property transferred to lhe credico]" was used in a pa .~si \'e activiry, lhe debt discharge income is passi\'e income. This income is offset" by suspended passive losses reponed on Form 8582, f'(lSS;W AClizlit)' Loss Lilllit(uiollS. While insolvent taxpayers exclude debt discharge income, they must reduce (to rhe eXlent possible) cenailliax attributes 1§108(b) j. A completed Form 982, Rer/uftioll Tin' Aflribllles Due to Discharge of IIIt/eutlY/liess, id entifies (0 the IRS Ihar debt cancellation income was not recognized due to a §108 exception. Ir also idell1ifies which tax arrribures arc reduced. If the excludcd income exceeds the lax attributes availabk for reduction, the "excess" incomc, in eITecl, disappears (with no fUrlher tax consequences to the debtor). The tax atttibutes arc reduced as of the first day of the year following the year of debt canccllation.
One of rhe mandarofY exceptions found under § I 08 (a) provides relief for insolvcm raxpayers. The rcrm " insolvcm" means an excess ofliabilirie5 over the flit market value (FMV) of assets. The imolvcnc)' exclusion under § I 08 applies oilly to rhis excess. The determination is made immediately before rill: discharge of inddm:dncss and locks in the amoum of the insolvency exclusion [§I08(d){3) ].
A Tax professional first must eSl'ablish if a raxpayer has income from rhe discharge of inddlt'i "," h ""' I""""",,, (ent'" me amoun! T rom \','OfksIloo! 3.
CIuITlfl la)1 .
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(""'''' 1M 3rM5 OI",,:kJ _13,200 13.200
5« WtJrkd"XI
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Ove,all gain 0, loss
..
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Works heet 3 For Form 8582, LinoS_3h, nnd 3c $ 00 CUf1'Mt yea,
Nan". 01 ""Ilo ily
ta) NOl Incomo tllne 3al
(b) NOI 10.5
tlill 3b)
(dl Ga in
tel Loss
·13,200 13.200
TOlal. Enter on Form S582, II".,;; 33,
Jb. and:le.
•
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I
July 2009 NATP TAXPRO Monthly
7
00
SCHEDULE E (Fo rm 1040)
• A"",,, to
Supplemental Income and loss
(From r ~ nt 31 real u \ai u, roy8~"'S . pa rtnerships, S c orPOCorne
Millie
0i ,oaI
'oyalty
properties.
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,
,
Deduct.DIe """al "'31 ""tate loSs.
Ca ution. Yoor ,.,.,tal reill 8562. Real ine Ior.os 24 ana 25. Enter me resu:l here. It PatIS II. III. N , and Io'Ie 40 on P"" 22. Do rn>l
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lncIwe any 1i>$Se' .
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2003)1)0
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· 199.500
501 _ _ . _ ... _ .....
Anne Done
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._--999 99 999'9
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Summa~
40 41
40 Not far m rontat 'r'ICoomo or (loul.CCIl't>nI no 16.3:'.ll,:S,,,,HH,' Ut:tJ!rtW:h!n"",,,kg""""'" fe?Ofled 00 Form ~ 1l35 . line 1: Sct>eOOle 1(-' (F"''''
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coOO 9: SdII es131. ptOlesoional$. tt roo "'we a """ aslalO prolOSS>Ot\3l (.... . - E·~)' etI1..- "'" oet iro::omo or (\0»1 }'rm IG-ID '" FOfI\\ lG-1().'lR I""" aI ff!y ~'o"Idef ,he p;l~ act""", loss ru!O$ 43
""'' 'ties
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,_ 4797
Sales
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1on 1231 gaO> h o m _ oolos ftom r "",,62:.:! . WI9::6oo _ . .....
ConDno _ 2 ~ 6_ E;m .. _~"'('Jaso$I ..... and
p ..-.....,. (c. cq>I oIeetir>v Iorvtructiom !of f orm 1065. Sct-... K. ..... 10.W1 or {Ie=} lo11owing!he
IOf. _ . ""'0f_ ~ kom you did "'" """'" _ prior)'8OO' "",,!Jon 1231 I}'IO'I fiom ..... 1 .. . C/IQdlII 9>'" on ....
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Gain From Disposition 01 Property Under SecUons 1245, 1250, 1252, 1254, and 1255
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,,'''on 1245.1250.1252. 1254.",1=JI"lIl"'Iy:
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Mjos'od bio>i .. Subtract ..... 22 1rom lone 2 1.
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SUmmary 01 Part III Gains . Complete properly COlumns A Itlr""llll 0 through 1 29b belore !)Qing to line 30 00
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30 T oWp..,,,,,, propMies. l\ddprop()rty~ "Ito-oo..ognD 24 ......
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..' - " ' '''''''''"'' ... ~D. 1ineo 2 51l.26\I.21e.26b.''''''29b . £'''.. ~ord on .... ' 3 s..tm>1 F"",,'797. 1iI'"Io 6
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8582
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Passive Ac t ivit y l oss Limitations
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Complet~
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Rental Rcal E.lat e Acti>;1;'" Witl1 Acti." Par1lcillation (For the def", ibon 01 act"", pM.;ipa!""', ""'" Spetl.ol Allowance ''''' Rent31 I00=
(tf1.Cf "'" amount !rom 1'10ilati,alion DeducUon5 From Renl"1 Real
2a Comfne.raI ,""Mlilal:OWed jnr~1 rwi~"'i~",1on _"':"~. ~
AcIMI;.,,;.,..;m ""t income I""' ''' ttle .mo,,,,! trom
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All Other Passive Activities
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Aclll'iloes wOOs ("""esses om",,,,, 00""" te. 2b , Q( 3c, Do no' compl(M Form 8582. flejlQ(l too losses "" til& wOlksllettts must be filed witrl Y Olir fa. retum. Keep a copr lor your rnc()lds
Worksheet 3-For Form 85B2. lines 311. 3b, and 3c (See page 8 of th", instructIOns.) Cun-ent year "' .me 01 3cti.ity
Pau i •• Pa rn\f" hi
PriQ( years leI U""""we '0 too..... """"'*
loe.> """"'''0''')
Fo,m Of X _"'"
la)l"..
(b11t·'kI
lei
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o
''''''' """"nt 1""1 in a hUe ' t caw) ~ c ~t" r ge 01 Qu.,ifitld 1:"m i"""m'-'a,9" 01 qualil;oo re;tI properly 1>u"..incw deb!cdClOSS _ e Disctmrll" 01 qual,tied pMopal ,.,.;oonce iflOObled ..... 5 O1scharll" 01 certain inIWI'IeSS 01 a qualrlt{>d ,o>d,\tidl«>ll>eCaS 1221(aKI I. ,""'hng to peid for sale 10 wMomef ~ ttaOe 0O,: Fo 01 q""lifiW 'cal l"opcu>l",,""" [ndobtoo ........ ~ppI.oo 10 ''''''''''' t.... ""'"'S of ~, ~pe oa .. s (una", sect"", 1017) 01
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, • , • •
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OOpeI ope., begi",""9 01 1M I.... yea, immed .. lely aH", Ih., Tax yy ""T""p~al~", lor !~" 'a>a'!J" 01 Qual,liOO lal m l"""OI""""ss. Applied to rOOuce T basis of yoor princ ip;ll 'esief1'I ONLY II line Ie is he ch«llodness, appbOO to 1e0 p'",locI."" of """"'"'.
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, lau,,,,,",,,s of larm,"9
0l'l 01 oncorne.
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"-Pf>!irf cred,t C3Il)'O'o'$S lrom the la. yaar 011M d;$Cha,1l"
~ied
fa red...:a MY lore19n IJX cred., c.:trry,mJ' Chris Numk. CPA
A taxpayer was a pania! owner of a principal residence where the lotal acquisition indebtedness exceeded $ 1 million. The taxpayer requesTed a Priv:uc Leller Rliling, asking whether the $ 1 million limir 011 acqui siti on indebtedness applies separately to each co-owner of a principal residence.
Under § I 63(h)(J)( B), acquisit iOIl inddlll"{l llI:.'ss is defined as any indcl)[cdllcss (h:H is: • Incurred in acquiring, constrllcting, or subsl :lnti:tlly
Acquisition indebtedness is 110( ddincd as any debt inCLlrred to acquire rhe raxpayer's portion of a qualified residence. [n addition, the $ 1 m illion limit applies to the aggregate :Ulloun t trea ted as acquisition indebtc·4 )·(i7X9
2 Amou nl o! debl clincelOd
l) · 1) - 20() H
S
S
27,s. 190
3 Inl&rest II Included In 00g
aPI no )
5 0.1)1 0Hcn1ll>On
4.H I J-I.mltimc L'Ull'
Ct, lUte ;lrlO zrp
c.oce
~ I illlt)\\' n . ~I I
;4321
6 Banu-.JPICt
A;:QOI,IIl! numbe1" (_ _Wt;flOnS)
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7 F ...
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and IS beIng "'n\ a'e '""IUI~ u> file a ,ewrn. a neg~ce penalty or ctIIer sanr;tlOn mav be Ifn;>oHCl on Vo /I , ..able ncom. results !rom tills UaMaCllOn arlO !hot IRS _",nes !hat It lias not ~ ,eponed.
s."...",.
F...m 1099-C
(keep for your records)
Example 2-Dcbt forgivcn relati ng to a business receivable: SlinlV:lc Clinic, LLC , is owned and operatcd by its sole member, Dr. C utl er. Dr. Curter reports Slinwac's operations on a cash basis Schedule C. SlinlV:lc uses :1 rejuvenation product. COrt C""L' Youth Replenisher. on ma ny of its patiellts. Slinwac f.. ik'(l to pay El ixir Pharmacy for a large qll a mi~' of Cortc/ Yomh Replenisher for almost two years. T he original invoice amount was 54 00,000; howevcr, every month Elixir added two percellt to Slimv:lC'S OIHSt:tnding balance. Aft er two yeatS, Or. Cun eI' settled the account with Elixi r for the amount of the original invoice, $400.000. Elixir issued a Form 1099-C to Slilllvac fo r the outstand ing fi nance charges of $243.375.
(See Form I099-C, below, issued by Elixir Ph armacy, Inc.) None of the amount listed on the Form 1099-C is reponed :IS in come by Slimvac. The alllount is specifi cally exceptcd from incollle under § 108(e)(2) bec:lllse Ihe fina nce charges. if paid by Slinwac, would have been deductible as interest expense on Schedule C. C:lre must be exercised whcn reporting cancellation of debt income. E cll situation must be anal)"Lcd based upon the fa cts • of the ind ividual taxpaye r's silu:l tion. Due 10 the va rier), of exccptions and exclusions rebting to can cellation of debt incollle, a general rule or thumb may not be applied in this :Irea.
D CORRECTED (if checked )
CREOITOR S _ . l1li""1 adel,,,". CIty stolfi an a,e .equued to file. ,eturn. a negbgence l>et<
()X--()")-43'") 1
can'*-
I~II I~
2 Amount cI
canc:eled
12-; - 20nX
1 Int","\ It
be. 2
•
S 24.Lr'"5
Slim vac Clinic
Sir.."
S
apt no)
24J.57S
.deI'n' (",cl"':lIng
5 Deb! doIc"PI'on
I Sp.l Cl'ntcr Lam'
C ty. I tale. aM ZIP COllI!
Sun V:tlll'\·. Ni\ I 99lJ9l)
A:coum number
t_ ,nlUructI"".)
6 Banlo.,upll;y
l:rlllKhll1
7 F .. , rna"'.1 .atu. ot ",,"p.,tt
S
",.,~
F"'m
1099·C
(keep for your records)
"
July 2009 NATP TAXPROMonthly
11