Page 25 - Tax Guide for Small Business

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5. The canceled debt is qualified principal residence in- b. The fair market value (immediately before the can-
debtedness which is discharged after 2006. See the cellation) of the business real property that is se-
Instructions for Form 982 for more information about curity for the debt, reduced by the outstanding
this exclusion. principal amount of any other qualified real prop-
If a canceled debt is excluded from income because it erty business debt secured by this property imme-
diately before the cancellation.
takes place in a bankruptcy case, the exclusions in situa-
tions 2 through 5 do not apply. If it takes place when you 2. The total adjusted bases of depreciable real property
are insolvent, the exclusions in situations 3 and 4 do not held by you immediately before the cancellation.
apply to the extent you are insolvent. These adjusted bases are determined after any basis
reduction due to a cancellation in bankruptcy, insol-
Debt. For purposes of this discussion, debt includes any vency, or of qualified farm debt. Do not take into ac-
debt for which you are liable or which attaches to property count depreciable real property acquired in contem-
you hold. plation of the cancellation.

Qualified real property business debt. You can elect Election. To make this election, complete Form 982
to exclude (up to certain limits) the cancellation of quali- and attach it to your income tax return for the tax year in
fied real property business debt. If you make the election, which the cancellation occurs. You must file your return by
you must reduce the basis of your depreciable real prop- the due date (including extensions). If you timely filed your
erty by the amount excluded. Make this reduction at the return for the year without making the election, you can
beginning of your tax year following the tax year in which still make the election by filing an amended return within 6
the cancellation occurs. However, if you dispose of the months of the due date of the return (excluding exten-
property before that time, you must reduce its basis imme- sions). For more information, see When To File in the form
diately before the disposition. instructions.

Cancellation of qualified real property business Other Income
debt. Qualified real property business debt is debt (other
than qualified farm debt) that meets all the following con-
ditions. The following discussion explains how to treat other types
of business income you may receive.
1. It was incurred or assumed in connection with real
property used in a trade or business. Real property Restricted property. Restricted property is property that
used in a trade or business does not include real has certain restrictions that affect its value. If you receive
property developed and held primarily for sale to cus- restricted stock or other property for services performed,
tomers in the ordinary course of business. the fair market value of the property in excess of your cost
2. It was secured by such real property. is included in your income on Schedule C when the re-
striction is lifted. However, you can choose to be taxed in
3. It was incurred or assumed at either of the following the year you receive the property. For more information on
times. including restricted property in income, see Pub. 525,
a. Before January 1, 1993. Taxable and Nontaxable Income.
b. After December 31, 1992, if incurred or assumed Gains and losses. Do not report on Schedule C a gain
to acquire, construct, or substantially improve the or loss from the disposition of property that is neither stock
real property. in trade nor held primarily for sale to customers. Instead,
you must report these gains and losses on other forms.
4. It is debt to which you choose to apply these rules. For more information, see chapter 3.
Qualified real property business debt includes refinanc- Promissory notes. Report promissory notes and other
ing of debt described in (3) earlier, but only to the extent it evidences of debt issued to you in a sale or exchange of
does not exceed the debt being refinanced. property that is stock in trade or held primarily for sale to
If you are the owner of a disregarded entity (for customers on Schedule C. In general, you report them at
TIP example, a single-member LLC), see Qualified their stated principal amount (minus any unstated interest)
Real Property Business Indebtedness in chap- when you receive them.
ter 1 of Pub. 4681 to see if you qualify for this exclusion. Lost income payments. If you reduce or stop your busi-

You cannot exclude more than either of the following ness activities, report on Schedule C any payment you re-
amounts. ceive for the lost income of your business from insurance
1. The excess (if any) of: or other sources. Report it on Schedule C even if your
business is inactive when you receive the payment.
a. The outstanding principal of qualified real property
business debt (immediately before the cancella- Damages. You must include in gross income compensa-
tion); over tion you receive during the tax year as a result of any of
the following injuries connected with your business.
• Patent infringement.

Chapter 5 Business Income Page 23