Trying to understand Form 982, never had to complete one before. Client had 1099-C debt income of $15,000 (student loan debt), that client was insolvent by $20,000. Now I’m in Form 982 trying to figure out how to apply to reduction of tax attributes.
Fact pattern:
-Married couple, wife has a small Sch C business with a minimal amount of inventory. No depreciable assets in the business.
-Small net capital gain on Sch D for this tax year of $300.
Going through the tax attributes in order (Pub 4681, Pg. 11):
1.) NOL – not applicable
2.) General business credit – not applicable
3.) Minimum tax credit – not applicable
4.) Net capital loss and capital loss carry-forward: no capital loss carry forward into tax year and as stated above, small capital gain in tax year.
5.) Basis – this is where I get further confused:
A&B). No asset was secured by the cancelled debt, not applicable.
C.) Any other property used in trade or business or held for investment (not inventory):
The client owns stocks in a brokerage account – do we have to reduce the basis in those stocks first?
D.) Inventory/Receivables: Would we then reduce the basis in inventory to zero for the following tax year?
E.) Personal Use Property: not used in trade of business. My understanding is any remaining amount would be proportionally allocated to personal use property.
Primary Concern: Please help me understand how to allocate the basis reduction with the above fact pattern.