The potential tax consequences of Cancellation of Debt (COD) Income have been facing taxpayers and corporations alike. Historically, if a lender forgives or cancels a debt, that debt is includable in gross income, meaning that it is taxable. The Mortgage Forgiveness Debt Relief Act of 2007, temporarily allowed taxpayers to be excluded from COD income under specific scenarios outlined in Section 108 of the Internal Revenue Code. Most recently, the American Taxpayer Relief Act of 2012 extended the exclusions until December 31, 2013.
So what does this mean for businesses? If you have had a cancellation of debt, there are several exclusions to evaluate to see if you qualify under IRC Section 108 to exclude COD income from gross income:
- Debt cancelled in a Title 11 bankruptcy case
- Debt cancelled during insolvency
- Cancellation of qualified farm indebtedness
- Cancellation of qualified real property business indebtedness
- As with most aspects of tax law, determining the proper treatment of COD income is a complicated matter that can result in serious unanticipated tax liabilities.