Looking at Publication 4681 https://www.irs.gov/pub/irs-pdf/p4681.pdf page 4:
Interest included in canceled debt. If any interest is included in the amount of canceled
debt in box 2, it will be shown in box 3. Whether the interest portion of the canceled debt must
be included in your income depends on whether the interest would be deductible if you
paid it. See Deductible Debt under Exceptions, later.
Looking at Deductible Debt on page 5: If you use the cash method of accounting, you don't realize income from the cancellation of debt if the payment of the debt would have been a deductible expense.
I hope this helps!
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