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April 8, 2023

A primer on cancellation-of-debt income and exclusions

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Unless specifically excluded under the tax law, COD income is taxable under Sec. 61. In the case of certain foreclosure transactions, the cancellation event could generate gain on the sale of the assets securing the debt; however, that analysis is beyond the scope of this item.

Exclusions from the general rule of COD income inclusion are found in Sec. 108. While there are several of these exclusions, this item focuses on four of them that are commonly used by operating businesses:

  • The bankruptcy exclusion;
  • The insolvency exclusion;
  • Exclusion of COD income that would generate a tax deduction if paid; and
  • Purchase-money debt reductions, as defined in Sec. 108(e)(5).
by Nick Gruidl, CPA, MBT; Joseph Wiener, J.D., LL.M.; and Sarah Lieberman, J.D.
https://www.thetaxadviser.com/issues/2023/apr/a-primer-on-cancellation-of-debt-income-and-exclusions.html

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