Tax time can be full of surprises, few of them pleasant. Every so often, even a taxpayer reporting absolutely no incoming funds can find that he or she is expected to pay on taxable income. Such phantom income will often come in one of three forms, as follows:
Cancellation of Debt
If you were, at any time over the tax year, forgiven of the obligation to repay a debt, this is called cancellation of debt (COD) income. The sum of the debt forgiven can be taxable, unless it was forgiven due to bankruptcy or insolvency. In many cases, your lender will be indicating the amount of debt you were forgiven on a Form 1099-C, which is submitted to the IRS to assure that it is not omitted on your return.
Partnerships, LLC’s, and S Corporations
These kinds of businesses are known as pass-through entities, which means that their owners are the ones expected to pay taxes on their income even in the event that the income is not distributed to them. If you are an owner in such an entity, you should receive a Form K-1 that lists your share of the loss or income.
If you are legally entitled to a payment, but choose not to collect on it, the IRS may still tax you on the money you are turning down. This includes payments that you attempt to delay, and then collect on a later date so that it applies to a different tax year; you will be expected to pay taxes on it for the year that you first had the right to the money.
Should you require any assistance in avoiding the IRS’s nastier surprises, please contact Seattle CPA Alisa Na during normal business hours.