Delay of Certain Cancellation of Debt

Article Source: http://www.irs.gov/formspubs

Certain businesses can make an irrevocable election to delay recognition income from the cancellation of business debt arising from the reacquisition of certain types of business debt repurchased in 2009 or 2010. If you make this election, you cannot exclude, for the taxable year of the election or any subsequent taxable year, the income from the cancellation of such indebtedness based on a title 11 bankruptcy case, insolvency, qualified farm indebtedness, or qualified real property business indebtedness.

Income is deferred until the 5th year after the reacquisition (4th year for reacquisitions in 2010), then the income is included ratably over the following 5 years.

The debtor must include an election statement with the tax return in the year the debt is reacquired. The statement must clearly identify the debt instrument and the amount of income deferred.

If elected, certain exclusions for cancellation of debt income would not apply to the income from the discharge of such debt for the year of the election or any later year.

For more details, including how to make the election, see section 108(i).

The Following is quoted from: About.com Guide By Lahle Wolfe,

Individuals, partnerships, corporations, and other entities must report income from debt cancellation on their tax returns, however, according to the IRS, income from cancellation of debt is not taxed if any of the following conditions apply:

* "The cancellation is intended as a gift.
* The debt is qualified farm debt (see chapter 3 of Publication 225, Farmer's Tax Guide).
* The debt is qualified real property business debt (see chapter 5 of Publication 334, Tax Guide for Small Business).
* You are insolvent or bankrupt (see Publication 908).
* The debt is qualified principal residence indebtedness."

File IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), to report the income exclusion.