Brandon operates a construction business as an unincorporated sole proprietor and has experienced severe financial difficulties....

 

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Brandon operates a construction business as an unincorporated sole proprietor and has experienced severe financial difficulties. Hoping to keep Brandon in business and to assure his future patronage, one of Brandon's major sub-contractors agreed to "write off" $25,000 of an uncontested $50,000 debt that Brandon owed for services received. This happened on April 1 of this year. Just prior to this partial cancellation of the debt, Brandon's total liabilities were $350,000 and the aggregate adjusted bases of his assets were $340,000. At such time, the aggregate fair market values of these assets were $320,000. Further, at the end of last year, Brandon's income tax return showed a $5,000 Net Operating Loss carryforward. Discuss the tax ramifications of the write-off to Brandon. Brandon operates a construction business as an unincorporated sole proprietor and has experienced severe financial difficulties. Hoping to keep Brandon in business and to assure his future patronage, one of Brandon's major sub-contractors agreed to "write off" $25,000 of an uncontested $50,000 debt that Brandon owed for services received. This happened on April 1 of this year. Just prior to this partial cancellation of the debt, Brandon's total liabilities were $350,000 and the aggregate adjusted bases of his assets were $340,000. At such time, the aggregate fair market values of these assets were $320,000. Further, at the end of last year, Brandon's income tax return showed a $5,000 Net Operating Loss carryforward. Discuss the tax ramifications of the write-off to Brandon.

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A debt owed could be a liability however upon being forgiven half or fully the forgiven quantity of ... View the full answer