ProSeries has a canceled debt worksheet that can calculate gross income, exclusions from gross income and gain and loss from foreclosure, repossession, abandonment, short sale, loan modifications, and other situations where debt is canceled.
Before you start:
The Canceled Debt Worksheet doesn't calculate the AMT difference, if any, that may exist on certain business assets. Generally, for example, rental property acquired prior to 1999 may have a difference in the gain or loss for AMT purposes due to different depreciation recovery rates. Review the Asset Entry Worksheet for depreciation differences that may result in an AMT adjustment. Then review the Form 6251 for any differences that should be reported.
Entering multiple cancelations:
- Forms 1099-A: In general, use one copy of the worksheet for each Form 1099-A, Acquisition or Abandonment of Secured Property, received.
- Forms 1099-C: In general, use one copy of the worksheet for each Form 1099-C, Cancelation of Debt. However, if multiple unsecured debts were canceled on the same date, you may use one worksheet for all the debts canceled on that date.
- When multiple cancellations apply, go to each Form 1099-C or Form 1099-A and double-click in the field at the bottom of the Form 1099 to link the Form 1099 to the matching copy of this worksheet.
Entering Parts I through XI
Part I - Debt Information
Complete the requested information about the canceled debt. The program will show on lines 4 and 5 the amounts already entered on Forms 1099-C and 1099-A.
Part II - Secured Property Information
For secured debt, complete Part II, with the requested information about type, usage, and disposition of the secured property. If box 7a, 7b or 7c is checked, the property is treated as a section 1250 property and the depreciation on line 12 isn't recaptured. The Canceled Debt Worksheet doesn't support section 1250 depreciation expense recapture.
Part III - Computation of gain or loss...
Complete Part III when property was transferred in connection with the cancelation of debt. Complete the acquisition information, disposition information, and additional debt information requested on lines 10 through 22. The program will compute the amount of gain or loss resulting from the transfer of the property.
Line 17a - If you check the Yes or No box on line 17b, the program will add the amount on line 4(d), 4(f), and 5(d) together and place the result on line 17a. Should you need to, you can easily change this amount by typing over the default value.
Part IV - Income from Cancelation of Debt
The program will show on line 28, the gross income from cancelation of debt computed in Parts I through III.
If there are any exceptions or exclusions available, complete Parts V through X, as applicable, otherwise, skip the remainder of this worksheet; the taxable income from cancelation of debt will be reported as Other Income on Form 1040.
Part V - Exceptions
For tax year 21 taxpayers that received eligible Student Loan Forgiveness may not have to report this as income on their tax return. Per IRS Guidance the creditor should not issue a 1099-C to these individuals. See IRS and Treasury issue guidance for students with discharged student loans and their creditors for more information.
In general, canceled debt must be included in income. However, there are four exceptions to this general rule. If one of these exceptions applies, enter the amount on lines 31, 32, 33, and 34c, as applicable.
Part VI - Exclusion for Bankruptcy
If your client's debt was discharged in bankruptcy, the amount of cancelation may be excluded from income.
Part VII - Exclusion for Qualified Principal Residence Debt
Answer the qualification questions A, B, C, 42, and 43, then complete line 44, and complete 46b, if applicable. The program will compute the amount of excludable canceled debt on line 49.
If your clients are eligible, they may elect to apply the insolvency exclusion before the Principal Resident Debt Exclusion. Complete Part VIII and Yes on line 43, if make that election. Not all states conform to the federal exclusion.
Part VIII - Exclusion for Insolvency
If your client's total liabilities exceed the total value of your assets at the time of the cancelation, they may exclude the canceled debt to that extent. Complete the Statement of Insolvency to compute and document the amount of insolvency.
Part IX - Exclusion for Qualified Farm Debt
Canceled debt which was incurred in connection with farming is eligible for exclusion. Complete Questions A, B, and C, and line 60. However, the amount of the exclusion may not exceed your clients tax attributes and basis of qualified property.
Part X - Exclusion for Qualified Real Property Business Debt
Canceled debt on buildings and other real estate used in a business is eligible for exclusion. Complete this Part to determine the exclusion amount.
Part XI - Exclusion of Gain from Sale of Principal Residence (Section 121)
Only complete Part XI if your client's main home was transferred and the transfer resulted in a gain shown on line 26 of Part III above.
Subject to the rules of Section 121, your clients may exclude some or all of the gain on the transfer of your main home. Complete the information requested on lines A, B, and C. The program will then calculate the allowable gain exclusion amount on line 86.
See the extensive tax help for this worksheet by going to the Help menu and selecting Help Center.
Linking Form 1099-C to Schedule C, E, F, or Form 4835
Follow these steps to link Form 1099-C to Schedule C, E, F, or Form 4835:
- Press the F6 key on your keyboard to view the Open Forms window.
- Type in CAN to highlight the line labeled Canceled Debt.
- Click OK to open the Canceled Debt Worksheet.
- Scroll down to the Business, Farm, and Rental Debt Smart Worksheet below line 30.
- Double-click one of the following options to link the 1099-C to that activity:
- Schedule C, Business
- Schedule E, Rental
- Schedule F, Farm
- Form 4835, Farm Rental