Generally, when individuals borrow money, they’re obligated to repay the debts. If the lender subsequently does a cancellation of debt (COD), the borrower may have to include all or part of the COD amount in gross income. Exclusions exist, such as when the debtor is insolvent (defined as when liabilities exceed assets) at the time the discharge occurs. One business owner sought to exclude COD income she received from the discharge of a business loan related to a lease agreement. She provided an insolvency worksheet showing that her legally enforceable liabilities exceeded her assets by $14,433 at the time of discharge. The U.S. Tax Court allowed an exclusion of that amount. (TC Memo 2023-77)
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