Form 982: What is a "discharge of qualified farm indebtedness"?

If your farm debt was canceled or forgiven, you may not have to report the canceled amount as taxable income. A discharge of qualified farm indebtedness is one of several exceptions that can allow you to exclude canceled debt from income by filing Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness.

What Is Qualified Farm Indebtedness?

Qualified farm indebtedness is debt that was incurred directly in connection with a farming business. To qualify for the exclusion, all of the following requirements must be met:

1. The debt was incurred directly in connection with your trade or business of farming.
2. At least 50% of your aggregate gross receipts for the three tax years immediately preceding the year the debt was canceled came from farming.
3. The debt was canceled by a qualified person.

Who Is a Qualified Person?

Generally, a qualified person is an individual, business, organization, or institution that is actively and regularly engaged in the business of lending money. Federal, state, and local governments, along with their agencies or instrumentalities, also qualify.

A qualified person cannot be:

• A related party,
• The person from whom you acquired the property, or
• A person who receives a fee related to your investment in the property.

If the debt was canceled by one of the parties listed above, the exclusion does not apply and the canceled debt is generally taxable.

How Much Canceled Farm Debt Can Be Excluded?

The amount you can exclude is limited. You cannot exclude more than the combined total of:

1. Your tax attributes, determined under Internal Revenue Code Section 108(g)(3)(B); and
2. The adjusted basis of property used or held for use in a trade or business or for the production of income.

Any canceled debt that exceeds this limit must be included in your taxable income.

When Does the Qualified Farm Debt Exclusion Not Apply?

The qualified farm indebtedness exclusion generally does not apply if:

• The debt discharge occurred in a Title 11 bankruptcy case, or
• The debt is already excludable because you were insolvent immediately before the cancellation.

If either of these situations applies, you may need to use a different Form 982 exclusion instead.

How Is the Excluded Debt Reported?

When you exclude canceled farm debt from income, you must reduce certain tax attributes. The excluded amount is generally applied in the following order:

1. Any net operating loss (NOL) for the year of discharge, including NOL carryovers to that year.
2. Any net capital loss carryover.
3. Any passive activity loss carryover.
4. Three times the total of:
   • General business credit carryovers to or from the tax year,
   • Minimum tax credits available as of the beginning of the following tax year,
   • Foreign tax credit carryovers to or from the tax year, and
   • Passive activity credit carryovers.

These reductions are reported on Form 982.

How to Enter Form 982 in the Program

To access Form 982 in the program:

1. Go to Federal.
2. Select Income.
3. Select my forms.
4. Choose Less Common Income.
5. Select Cancellation of Debt Form 1099-C.
6. Choose Exclusions (Form 982).

Additional Information

If you received a Form 1099-C and are unsure whether your canceled farm debt qualifies for this exclusion, review the IRS guidance carefully before filing.

For more details, see:

• IRS Instructions for Form 982
• IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments
• IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness

These resources provide additional guidance on qualification requirements, reporting rules, and tax attribute reductions related to canceled debt.