If a debt is forgiven consisting of principle and accrued interest are both considered taxable income or just the principle borrowed ? I've had 2 CPAs give differing answers...Thank youDale
Under IRC 108(e)(2), any item of debt forgiveness that would have given a deduction if it was paid will not be included in debt forgiveness income (not taxable).So it all depends on what you used the loan to answer your question. -Used your Visa to buy cloths, then both prinicpal and interest would be taxable. -Used the Visa to buy business supplies, only the principle would be taxable because the interest would be deductable if paid as business expenses. The reason this rule does not apply to the principle is because the principle would have already been deducted previously.You maybe able to get out debt forgiveness if you meet any the requirements of IRC 108, for example bankruptcy or insolvency. You may find form 982 helpful.Hope this helps
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