How to Report Forgiveness of Debt on a 1065
Debt forgiveness releases a business partnership from its obligation to repay a loan. However, the Internal Revenue Service counts cancelled debts as income for the partnership. This means the company must report, and pay taxes on, forgiven debt on form 1065, also known as a partnership tax return. The lender that cancelled the debt will usually send a 1099-C form by February 15 detailing the amount of debt that was forgiven, but you must still report the forgiven debt if the lender does not send a 1099-C.
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Instructions
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Download Form 1065 from the IRS website. The PDF file contains the U.S. Return of Partnership Income form and schedules A, B, K, L ,M-1 and M-2.
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Complete the first section with information about your partnership. This includes the name, address, Employer Identification Number, business start date, business activity, the accounting method the partnership uses and the number of partners in the business. You must fill out the attached schedules to complete the other sections.
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Complete Schedules A and B and enter the figures on the appropriate lines of the first page of Form 1065.
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Enter information about the partnership's income in the first section of Schedule K. Enter the amount of debt that was forgiven on line 11 of Schedule K. Enter "E" as the type to indicate the income is from the cancellation of debt. Enter the figure on Line 8 of the first page of Form 1065 as well.
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Complete the rest of Schedule K and Schedules L, M-1 and M-2 as applicable. Enter the figures on the appropriate lines, and sign and date the return.
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