 Hello and welcome to the session in which we would look at two topics. The cancellation of debt and the taxation of prices and awards. Both of these items are listed on schedule one which is additional income and adjustments and all additional income is added then transferred flow to other income online 1040. So what does that mean? That means cancellation of debt and prices of prices and awards are taxable. However, there's always exception to the rules and this is what we need to talk about. Starting with prices and awards. Before we proceed any further, I have a public announcement about my company farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions as well as exercises. Go ahead, start your free trial today, no obligation, no credit card required. The first thing I want you to think about when you think of prices and awards is this picture here, which is Matt Murphy, a college student from Queen and Barry Bonds, the baseball player. Now Matt Murphy caught the home run, the 756 home run for Barry Bonds and as a result that catch was worth $600,000. So the baseball that he catches is worth $700,000. Can he keep it? Sure he can. Can he keep it? However, you received a price for $600,000. What do you have to do at the end of the year? Well, you have to compute your taxes and let's assume 20%. Your tax bill will be $120,000, most likely $600,000 is approximately 30%. So you have to pay. If you want to keep that ball, that's fine, but you have a tax bill of $180,000. Now some value the ball at the baseball at $500,000, some $600,000, but to make the point is if you receive any sort of a prize or an award, generally speaking, there's always an exception, you have to pay taxes on that. How can someone get out of it? How can someone get out of this prize as an award? Well, they're included in the taxpayer gross income at fair value. However, an exception applies if all the following conditions are met. So let's take a look at the all the conditions. The price or the award is received in recognition of religious, charitable, scientific, educational, artistic, literacy, literally civic achievement, for example, Nobel Prize, faculty teaching awards, so on and so forth. Two, the recipient immediately transferred the prize or award to a qualified governmental unit or nonprofit organization. So okay, that's fine. You received it, but you are going to transfer it immediately. And the recipient was selected without any action on his or her part to enter the contest or the proceeding. So simply put, you won this award, you did not even ask for it. Also the recipient is not required to render substantial future service as a condition for receiving the prize or the award. And simply put, just make sure we understand this, that if you have to work for this award, it becomes earnings, then it's taxable. So you have to meet all of these four conditions. And what's the easiest one to do? Avoid the inclusion by rejecting, just say, thank you very much. I reject the award. You don't have to be responsible for it. So this is what you would do as well. Something close close to prizes and awards are damages, damages awards. What's damages award? If you, if somebody did something wrong to you and let's assume you have a business and someone ran and render car into your business and you have to close for a week. Well, guess what? You're going to be receiving damaged award from the insurance company or from the insurance company of the plaintiff. Well, a damage award that represent compensation for lost profit since your store was closed. Guess what? That's gross income that the IRS wants you to pay taxes on. You didn't get it from your store, but you got it from the award punitive damages. If you sue someone because they ruined your reputation. That's punitive. Well, loss for personal reputation should also be included in gross income. Now let's talk about the cancellation of that. And what's the cancellation of that is, is when someone forgive the debt that you owe them. They say, forget about it. We don't want your money. We don't want the money. That's it. Let's call a close case. Now let's talk about the cancellation of that. What's the cancellation of that is when the taxpayer that is canceled or forgiving? Well, they should report this as taxable income for the amount of the debt. Let's assume you owe $5,000 on your credit card and what's forgiving? Well, guess what? That $5,000 becomes income to you. An exception occurs when the debt is discharged because the taxpayer is insolvent. And what is insolvent? It means you have negative equity. What is negative equity? It means you have more debt than assets. This is when you have negative equity in which the cancellation of the debt is not taxable. Well, guess what? You don't have money to pay anything, let alone pay taxes on that additional income. Also, canceled non-recourse secured loan. That's also, that's also an exception for closure on your main residency on your main home. They took your home because you lost your job or whatever the reason is, it's treated as a sale. It's treated as a sale. It's not a forgiveness of that. Basically, you don't have to include this. Also forgiving student loan by lender, by, for example, the financial institution from 2021 through 2025 are not included in income. Let's take a look at this example. Jane borrowed $20,000 from ABC Bank to purchase a car. That's a great. The loan was payable over a period of four years. In the middle of the fourth year, Jane lost her job and defaulted on the loan. Well, what would, what would Jane do? She negotiated with the bank to see if they can cancel the remaining balance, which was $3,500. The bank did agree. Well, if they do cancel your balance, they will send you a form called 1099C and they would, they would report the 3,500 in addition, in addition to your wages as taxable, as taxable income. Now, I was in practice the year 2006 up to 2009. And if you remember anything, we had the financial crisis and in 2009, we had a lot of 1099C. So I saw a lot of 1099Cs because businesses were defaulting, especially construction companies, they were defaulting on their assets. So it's something I was pretty familiar with, with this for 1099C. What should you do now? Go to Farhat Lectures. Look at additional resources, multiple choice through false. That's going to help you, whether you are a CPA candidate or an enrolled agent student or an accounting student, invest in yourself, invest in your career. Accounting is worth it. Good luck. And of course, stay safe.