 Dividends. Generally dividends are business income to dealers in securities. So dividends, that is going to be what is a dividend. If you are a shareholder of a corporation, corporations are separate legal entities, then they break out the ownership of the corporation into equal shares. And then to get distributions from the corporation's earnings, they distribute in the form of dividends. Therefore, normally for most people who are passive investors, they're investing in companies and are passive investors, then you would have dividend income that would be passive income, wouldn't be business income typically. But if you're in the business of dealing with dividends, then you might be in a different situation having like business income. So once again, generally dividends are business income to dealers in securities. So for most sale proprietors and statutory employees, however, dividends are non-business in income. So if you hold stock as a personal investment separately from your business activity, the dividends from the stock are non-business income. So most people fall into that category. We might have a business and we might have some investments in stocks. When we get the investment income or dividend income from those stocks that aren't related to the business, then it would be more passive income. It wouldn't be part of the business income. We would report it separately as dividend income, possibly using a schedule B, which we talked about in prior presentations. So if you receive dividends from business insurance premiums, you deduct in an earlier year, you must report all or part of the dividend as business income on your return. So to find out how much you have to report, see recovery of items previously deducted under other income later. Cancel debt. The following explain the general rule for included canceled debt in income and the exceptions to the general rule. So note, usually, if you had canceled debt, you owed somebody money and now they say you don't owe them the money anymore, that's basically income because that would be similar to them actually giving you the money and then you pay off the debt with the money they gave you. So the general rule you would expect canceled debt would be income, but you can also imagine a lot of areas where there might be exceptions to that general rule because if someone is canceling the debt, it's probably because you're not liquid. You're in financial difficulties or something like that, in which case there might be laws in that instance where the canceled debt would be exempt from income possibly in certain situations. So general rule, generally, if your debt is canceled or forgiven, other than as a gift or bequest to you, you must include the canceled amount in your gross income for tax purposes. Report the canceled amount on line six of schedule C if you incur the debt in your business. If the debt is non-business debt, report the canceled debt on line eight C of schedule one form 1040. Exceptions. The following discussion covers some exceptions to the general rule for canceled debt. So you've got the price reduced after purchase. If you owe a debt to the seller for property you bought and the seller reduces the amount you owe, you generally do not have income from the reduction because they're adjusting in essence the price in that case. Unless you are a bankrupt or insolvent, treat the amount of the reduction as a purchase price adjustment and reduce your basis in the property. So you bought something, they said you owe it, you haven't yet paid for it, they then reduced the price. So and the item that you purchased then has become cheaper in essence because when you originally thought that you were going to purchase it, it had a higher price. Now it's a lower price. So you might be able to just simply adjust the basis of the cost of the thing that you purchased in that case instead of recording income for the cancellation of the debt. So deductible debt, if you do not realize income from a canceled debt to the extent the payment of the debt would have led to a deduction. So if it would have led to a deduction, then if you were to include it, you would have income and then a deduction which would net out anyways, so you may not have to include it at all in that case. Example, so you get accounting services for your business on credit. Later you have trouble paying your business debts, but you are not bankrupt or insolvent. Your accountant forgives part of the amount you owe for the accounting services. How you treat the canceled debt depends on your methods of accounting. So if you're in a cash method, you do not include the canceled debt in income because payments of the debt would have been deductible as a business expense. So if you're on a cash based method, then you haven't, when you're talking about debt, there had been no cash that had taken place yet at that point in time. So you hadn't really record anything when the cancellation took place. So you could record the expense and then the cancellation of the debt which would kind of net each other out. It's generally on an accrual basis method where you would think there would be something taking place here. On the accrual method, you include the canceled debt in income because the expense was deducted when you incurred the debt. So in that case, you took the expense when the debt was incurred because you're on an accrual type of basis and now they've removed the debt so you no longer owe the debt. So you've got the expense last time and now that basically they've removed your capacity or need to pay it off. So that you would think then would be income. And you notice you have a two different time frames, two different accounting periods, which is kind of part of the problem. Because you could say, well, I could go back to the prior accounting period and say that the expense and amend of the return and say that the expense that I have wasn't a legitimate expense because they canceled the debt in the future year. So you might think I should go back and amend the prior year tax return. But no, it would be easier to fix things going forward. So if you've got a deduction from it last year, then you would think you'd have to record it as income in this year. When we talked about the cashed kind of method, you would think that those two things are happening in the same year because you wouldn't have taken the expense in the prior year because you had not yet paid for it in the prior year. Therefore, you know, you don't have to really do anything because it's a cash based method. Because if you put it on the books as an expense and then cancel it in the same year, it would net out, you know, anyways. So for information on the cash and accrual methods of accounting, you can see chapter two. So we talked a little bit about that in prior presentations. Exclusions do not include canceled debt and income in the following situations. However, you may be required to file form 982 reduction of tax attributes due to discharge of indebtedness. So for more information, you could see form 982 and take a look at the instructions for it possibly on the IRS website. Number one, the cancellation takes place in a bankruptcy case under Title 11 of the US Code relating to bankruptcy. So now you're in a situation of a bankruptcy type of situation. There's different titles for bankruptcy. So you want to make sure that if you're in a situation where basically you're insolvent, you can't pay the debts, then you might be going through a bankruptcy type of situation which is designed to try to either negotiate the debts that you owe in such a way that will be fair to you and the person that you owe the money to and hopefully, you know, restart, wipe out and start at a clean slate at that point in time. So again, that's a special kind of situation, of course. So you could see Publication 908 bankruptcy tax guide if you're thinking about that situation. Number two, the cancellation takes place when you are insolvent. So insolvent meaning you basically don't have the money to basically pay the debt, right? You don't have the cash flow necessary. So you can exclude the canceled debt to the extent you are insolvent. So now we've got this definition of what it means to be insolvent. And this once this goes back to the general concept that obviously if you owe someone money and they cancel the debt, that's basically like they gave you the money and then you gave it back to them, right? It's income. But if you're insolvent or if you're going through a bankruptcy type of situation, that's why you can imagine where these exceptions would come into play because you're having, you know, the financial difficulties and those types of situations. It's beneficial oftentimes for both sides of the transaction to come to some fair negotiated settlement in that case, because you can't pay the debt. The determination would be you can't do it. So that means that the person that you owe the money to, it would make sense to them to come up to some agreement where they can get paid what they're going to get paid in a situation where the other party cannot make the payment because they're insolvent, which could lead to a bankruptcy kind of situation or some other agreed upon change. So you can see publication 4681, cancel debt, foreclosure, repossession, and abound abandonment. Number three, the cancel debt is qualified form debt owed to a qualified person for that special rules oftentimes for forming special situations oftentimes. So see chapter three of publication 225, farmer's tax guide. Then you got number four, the cancel debt is a qualified real property business debt. This situation is explained later. Number five, the cancel debt is qualified principal residence indebtedness and with discharge after 2006. See the instructions for form 982 for more information about this exclusion. So if a cancel debt is excluded from income because it takes place in a bankruptcy case, the exclusion in situations two through five do not apply. So you want to make sure that if you're doing a bankruptcy situation, the laws related to the bankruptcy might, you know, take precedent, right? Depending on which course you're going to be taking in a bankruptcy type of situation. So you want to, if you're thinking about that type of situation, make sure to do your research and look at the options. Is it possible for me to negotiate this without going through the bankruptcy process? And if I have to go through bankruptcy process, what's the best kind of process bankruptcy type that I can use chapter seven, chapter 11, and so on and so forth. So if it takes place when you are insolvent, the exclusions in situation three and four do not apply to the extent you are insolvent. So then you can get into the definition precisely of what it means to be insolvent so that you can then take that into consideration when making your decision there. So debt for purpose of this discussion, debt includes any debt for which you are liable or which attaches to property you hold. So you're liable, you owe something. If it attaches to property, that typically means that the property is going to be like collateral on the debt in some way or sub form. In other words, if you don't pay it, they might be able to take claim back to the property repo the car or something qualified real property business debt. So you can elect to exclude up to certain limits to the cancellation of qualified real property business debt. So real property typically real estate we're talking here. So if you make the election, you must reduce the basis of your depreciable real property by the amount excluded. So notice a lot of times with the real property, we've got this interplay between the adjusted basis, because when you sell the property, then you're going to end up with a gain oftentimes on the real property. So with the basis of the property, the cost and then the improvements and how much you put into the property and whatnot, depreciation if it's a business property, those kind of things are going to be the adjusted basis. And when you sell it, it's going to be the cost minus the adjusted basis. So the what you want is to have as high an adjusted basis as possible, so that when you sell it, you have as low a gain as possible or possibly having a loss. So sometimes you'll see that the basis will be adjusted, which is kind of like a deferral of whatever tax consequence will happen. So if they lower the basis, that means that when you sell the property, then you're going to have more of a gain, which could have a higher tax consequence, a negative tax consequence at the point of sale, the real property or the real estate. Making this reduction at the beginning of your tax year following the tax year in which the cancellation occurs. However, if you're disposed of the property before that time, you must reduce its basis immediately before the disposition or a cancellation of qualified real property real property business debt, qualified real property business debt is debt other than qualified form debt that meets all the following conditions. Number one, it was incurred or assumed in connection with real property used in a trader business. Real property used in a trader business does not include real property developed and held primarily for sale to customers in the ordinary course of business. That because if you if you did it for that purpose, you bought it in order to sell, that would be more like inventory, you would generally think. So number two, it was secured by a search real property. It was secured by such real property, meaning it was secured used as in essence collateral. In other words, if you defaulted on paying back the debt, the property could be used to fulfill the debt. So number three, it was incurred or assumed at either of the of the following times. Number one, before January 1st 1993 or B, A or B December 31st 1992, if incurred or assumed to acquire, construct or substantially improve the real property for it is debt to which you choose to apply these rules. Okay, so qualified real property real property, qualified real property business debt includes refinancing of debt described in three above, but only to the extent it does not exceed the debt being refinanced. Election. To make this election complete form 982 and attach it to your income tax return for the tax year in which the cancellation occurs, you must file your return by the due date, including extensions. If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within six months of the due date of the return excluding extensions. For more information, you can see when to file in the instructions. So other income. The following discussion explains how to treat other types of business income you may receive.