The short answer

What it reportsCancellation of a debt owed to a financial institution, the federal government, a credit union, RTC, FDIC, NCUA, a military department, the U.S. Postal Service, the Postal Rate Commission, or any organization having a significant trade or business of lending money.
Amounts to report$600 or more
To the recipientJanuary 31
To the IRS, on paperFebruary 28
To the IRS, electronicallyMarch 31

If one arrives

Cancelled debt is generally income, but there are exclusions — insolvency and bankruptcy among them — claimed on Form 982. Do not assume the full amount is taxable.

The form is how a payer tells the IRS what it paid. Its absence is not permission — income you received is reportable whether or not a form covers it, and a threshold decides only who must file, never what you owe.

Who sends it

Certain creditors, among them federal agencies, financial institutions and credit unions, file it "for each debtor for whom you canceled a debt owed to you of $600 or more" once an identifiable event has occurred. The form reports that you were released from paying some or all of what you owed, and it "must be filed regardless of whether the debtor is required to report the debt as income." Whether the amount is taxable is decided on your return. A debt run up in your name through identity theft is not reported on it at all.

Canceled debt is generally income

When the obligation to repay is cancelled, the amount you no longer have to pay usually becomes income: "In general, if your debt is canceled, forgiven, or discharged for less than the amount owed, the amount of the canceled debt is taxable." A nonbusiness debt goes on Schedule 1, line 8c. A business debt goes on the schedule for that business, such as Schedule C.

The exceptions that apply first

Some cancellations are not income at all. Two matter most to a self-employed reader:

  • A debt that would have been deductible if paid. On the cash method, a forgiven bill for a business expense is not income, because paying it would have been a deduction. Publication 4681's example: an accountant who did work for a farm on credit forgives part of the bill the next year. On the cash method, nothing is income. On the accrual method it is, because the expense was already deducted when it was incurred.
  • A price reduced by the seller. If the seller of property you bought on credit reduces what you owe for it, that is treated as a lower price, not as income, when you are not insolvent or in bankruptcy.

Amounts cancelled as a gift, or passed on by bequest or inheritance, are not income either.

The exclusions

Where no exception applies, an exclusion may still keep the amount out of income, though you then reduce certain tax attributes, such as losses, credits and the basis of property, on Form 982:

Exclusion What it covers
Bankruptcy Debt cancelled in a Title 11 bankruptcy case
Insolvency Debt cancelled while your liabilities exceeded the fair market value of your assets, up to the amount of that excess
Qualified farm indebtedness Farm debt that meets the conditions in Publication 4681
Qualified real property business indebtedness Debt on real property used in a business

Insolvency is measured "immediately before the cancellation," and counts everything you own, including retirement accounts that creditors cannot reach. Publication 4681's example: a $5,000 debt is cancelled when you owe $15,000 in all and own assets worth $7,000. You were insolvent by $8,000, which is more than the $5,000, so none of it is income. Had you owed $10,000 in all, you would have been insolvent by only $3,000, and $2,000 would be income.

The boxes a reader meets

Box What it holds
1 Date of the identifiable event that cancelled the debt
2 Amount of debt discharged
4 Description of the debt
5 Checked if you were personally liable for repayment
6 A code for the event that cancelled the debt
7 Fair market value of property, where property was involved

Not every box is covered here. When property securing the debt was taken or abandoned in the same year, the creditor may report both events on this form instead of also sending Form 1099-A.

Common questions

Is a canceled debt income?
Generally, yes. Topic 431: "In general, if your debt is canceled, forgiven, or discharged for less than the amount owed, the amount of the canceled debt is taxable." Several exceptions and exclusions take some or all of it back out.
My accountant forgave part of a bill I owed for work on my business. Is that income?
Not if you use the cash method. Publication 4681: "you don't realize income from the cancellation of debt if the payment of the debt would have been a deductible expense." On the accrual method it is income, because you already deducted the expense.
The creditor is still asking me to pay. Was the debt canceled?
Perhaps not. Topic 431: "If a creditor continues to attempt to collect the debt after you receive a 1099-C, the debt may not have been canceled and you may not have income from a canceled debt." Check with the creditor.
The form is wrong. What do I report?
The correct amount. Ask the creditor to correct it, but Topic 431 is clear that your responsibility "to report the correct taxable amount of canceled debt as income on your tax return for the year in which the cancellation occurred remains, regardless of the accuracy of the Form 1099-C you received."
How do I claim the insolvency exclusion?
On Form 982, attached to your return, checking the box on line 1b. You exclude the smaller of the canceled debt or the amount by which you were insolvent immediately before the cancellation, and reduce your tax attributes in Part II of the same form.

This page is for educational purposes only and does not constitute tax, legal, or financial advice. It covers United States federal reporting. Consult a qualified tax professional about your situation.

Official sources