Entering Cancelation of Debt and/or OID for Partnership S-Corporate or Corporate Returns in Lacerte

Solution Description

There are several ways to report Cancelation of Debt income for business returns. It's up to you to decide which method is correct based on the Form Instructions and Publications.

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Per IRS Publication 544:

Report income from cancelation of a nonbusiness debt as other income on Form 1040 as Other Income. Partnerships, corporations and other entities, report this income on the comparable line on your tax return.

Therefore the amount would be reported as "Other Income" on the Partnership, Corporate or other entity tax returns, however, income from cancelation of debt is not taxed if any of the following conditions apply:

• The Cancelation is intended as a gift
• The debt is qualified farm debt
• The debt is qualified real property business debt
• You are insolvent or bankrupt (see Publication 908)
• The debt is qualified principal residence indebtedness

The reporting also depends on if the cancelation of debt and/or original issue discount is deferred under IRS Section 108(i):

A corporation can elect to defer cancelation of debt (COD) income in connection with an applicable debt instrument reacquired after 2008 and before 2011 and include the deferred income over a 5-year period. See Other Income (loss) Code E. In addition, any applicable accrued original issue discount (OID) is allowed as a deduction ratably over the 5-year period that the income from cancelation of debt is includible in income. See Other Deductions Code S.

To enter Other Income:

1. Go to the Income screen:
   • Screen 10 (Partnership)
   • Screen 13 (S Corporate)
   • Screen 13 (Corporate)
2. Hold down Ctrl+E in, Other (Ctrl+E).
3. Enter the Description and Amount.
4. Click OK.

Note: If the Cancelation of Debt income should pass through to the partners/shareholders, use the Other Income field on Screen 20, Income and Deductions for S Corporations, or Screen 22, Other Schedule K Items for Partnerships.