To qualify for farm indebtedness, all of the following must apply:
- Qualified farm indebtedness is the amount of indebtedness incurred directly in connection with the trade or business of farming.
- In addition, 50% or more of your aggregate gross receipts must be from the trade or business of farming for the 3 tax years immediately preceding the tax year that the indebtedness was discharged.
- Secondly, the discharge must have been made by a qualified person. Generally, a qualified person is an individual, organization, etc. who is actively and regularly engaged in the business of lending money. A qualified person also includes any federal, state, or local government or agency or instrumentality thereof.
- This person cannot be:
- related to you; or
- the person from whom you acquired the property; or
- a person who receives a fee with respect to your investment in the property.
- If the person who released you from the debt was any of those, you do not qualify to exclude that debt. The cancellation of debt must be included in your income. A qualified person includes any federal, state, or local government or agency or instrumentality thereof.
- This person cannot be:
What amount of cancelled debt can be excluded from income?
You cannot exclude more than the total of your:
- tax attributes (determined under section 108(g)(3)(B)); AND
- basis of property used or held for use in a trade or business or for the production of income.
Any amount in excess of the total of 1 and 2 must be included in your income.
If you had debt cancelled and are no longer obligated to repay the debt, you generally must include the amount of cancelled debt in your income. However, if it was a discharge of qualified farm indebtedness, the debt generally does not have to be added to your return as income. The exclusion relating to qualified farm indebtedness does not apply to a discharge that occurs in a title 11 case or to the extent you were insolvent.
How to Report
When reporting the exclusion of debt, the debt discharge amount will be applied to reduce the tax attributes in the following order:
- Any net operating loss (NOL) for the tax year of the discharge (and any NOL carryover to that year).
- Any net capital loss carryover in the tax year.
- Any passive activity loss carryover in the tax year
- Three Times the sum of any:
- General Business credit carryover to or from (within the tax year)
- Minimum tax credit available
- Any foreign tax credit carryover to or from the tax year of the discharge.
- Passive activity credit carryover within the tax year.
To locate Form 982, go to:
- Federal Section
- Select My Forms
- Less Common Income
- Cancellation of Debt Form 1099-C
- Exclusions (Form 982)
For instructions for Form 982 click here.
For more information, please review Publication 4681 and Form 982.