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Scenario $2$: Bankruptcy and Discharge of Debt

A sole proprietor has a $$150,000$ NOL carryforward.

The business becomes insolvent and files for bankruptcy.

$$80,000$ of business debt is discharged $($forgiven$)$ in the bankruptcy proceedings.

Wages: $$35,000$

Interest and Dividend Income: $$1,000.$

Itemized Deductions: $$18,000$

Allowable deduction for self$-$employment tax: $$2,800$

Questions:

Is the discharge of debt considered taxable income?

Discuss potential exceptions that might apply to exclude the discharged debt from income.

If the discharged debt IS taxable, how does this impact the ability to use the NOL carryforward?