Tax Attribute
Tax attribute refers to certain losses, tax credits, and the adjusted basis of property that must be reduced because of the exclusion of debt cancellation from a taxpayer's gross income. Excluding income under Section 108 requires that a taxpayer postpone his or her tax liability by decreasing dollar-for-dollar (or in some cases, 1/3 of each dollar) certain tax attributes that would otherwise be available to offset future income. So, in effect, when a debt is canceled, the taxpayer forfeits some tax attribute benefits in exchange for receiving favorable treatment relating to the bankruptcy. The Internal Revenue Code (IRC) stipulates that taxpayers must reduce seven tax attributes in the following order: Net operating loss from any business General business credit carryover Alternative minimum tax credit Capital loss The cost basis of property Passive activity loss Foreign tax credit carryover Taxpayers may use IRS Form 982: _Reduction of Tax Attributes Due to Discharge of Indebtedness_ to reduce the basis of depreciable assets before reducing the other tax attributes. According to the cancelation of debt (COD) income rules, canceled debt will not be taxable if: The debt was discharged in bankruptcy. The debtor is insolvent, with debts greater than assets, but only to the extent of the insolvency. The canceled debt was a gift or an inheritance from a friend or relative. Individual and business taxpayers who are forgiven their debts due to insolvency or bankruptcy do not have to include the forgiven debt as part of their taxable gross income. Tax attribute refers to certain losses, tax credits, and the adjusted basis of property that must be reduced because of the exclusion of debt cancellation from a taxpayer's gross income. In this case, Section 108 of the Internal Revenue Code (IRC) exempts gains from forgiven debt from being factored into taxable income, providing a measure of relief for certain taxpayers who find themselves facing serious financial difficulties.
What Is a Tax Attribute?
Tax attribute refers to certain losses, tax credits, and the adjusted basis of property that must be reduced because of the exclusion of debt cancellation from a taxpayer's gross income. Tax attributes are adjusted when a taxpayer is insolvent or declares bankruptcy.
How Tax Attributes Work
According to the cancelation of debt (COD) income rules, canceled debt will not be taxable if:
Individual and business taxpayers who are forgiven their debts due to insolvency or bankruptcy do not have to include the forgiven debt as part of their taxable gross income. However, the discharged debt translates to financial gain. Under ordinary taxation principles, the Internal Revenue Service (IRS) taxes most financial gains earned by individuals and businesses. In this case, Section 108 of the Internal Revenue Code (IRC) exempts gains from forgiven debt from being factored into taxable income, providing a measure of relief for certain taxpayers who find themselves facing serious financial difficulties.
However, the amount excluded from gross income is used to reduce certain tax attributes. Excluding income under Section 108 requires that a taxpayer postpone his or her tax liability by decreasing dollar-for-dollar (or in some cases, 1/3 of each dollar) certain tax attributes that would otherwise be available to offset future income. So, in effect, when a debt is canceled, the taxpayer forfeits some tax attribute benefits in exchange for receiving favorable treatment relating to the bankruptcy.
The Internal Revenue Code (IRC) stipulates that taxpayers must reduce seven tax attributes in the following order:
Taxpayers may use IRS Form 982: Reduction of Tax Attributes Due to Discharge of Indebtedness to reduce the basis of depreciable assets before reducing the other tax attributes.
Example of a Tax Attribute
For example, if $5,000 in debt was forgiven, then the taxpayer could elect to have the basis (cost price) of their rental property reduced by $5,000 and defer the tax until the property is sold. Reducing the cost basis of an asset means that a taxpayer will recognize a higher taxable gain (or smaller loss) from the sale of the asset. If the property is sold for a gain, then $5,000 of that gain will be taxed as ordinary income.
Related terms:
Alternative Minimum Tax (AMT)
An alternative minimum tax (AMT) places a floor on the percentage of tax that a filer may be required to pay to the government. read more
Bad Debt Recovery
Bad debt recovery is a payment received for a debt that was written off and considered uncollectible. The receivable may come in the form of a loan, credit line, or any other accounts receivable. read more
Bankruptcy
Bankruptcy is a legal proceeding for people or businesses that are unable to repay their outstanding debts. read more
Cancellation of Debt (COD)
The cancellation of debt (COD) occurs when a creditor relieves a debtor from a debt obligation. Debts forgiven by a creditor are taxable as income. read more
Cost Basis
Cost basis is the original value of an asset for tax purposes, adjusted for stock splits, dividends and return of capital distributions. read more
Foreign Tax Credit
The foreign tax credit is a nonrefundable tax credit for income taxes paid to a foreign government as a result of foreign income tax withholdings. read more
General Business Tax Credit
The general business tax credit is the total value of all the individual credits to be applied against income on a tax return. read more
Insolvency
Insolvency is a situation in which an individual or company cannot pay off bills and debts. read more
Internal Revenue Code (IRC)
The Internal Revenue Code is a comprehensive set of tax laws created by the Internal Revenue Service. read more
Net Operating Loss (NOL)
Net operating loss (NOL) is the result when a company's allowable deductions exceed its taxable income within a tax period. read more