posted on 06-06-2019

Tax Attribute

Updated October 1, 2019

What is a Tax Attribute?

A tax attribute is a reduction that the IRS requires a taxpayer to make in a tax credit or tax loss when a lender cancels debt that the taxpayer owes. There are typically seven types of tax attributes: net operating losses, business credit carryovers, minimum tax credits, capital losses, property bases, passive activity loss and credit carryover, and foreign tax credit.

How Does a Tax Attribute Work?

John Doe qualifies for a $2,000 minimum tax credit. A tax credit is dollar-for-dollar reduction in John Doe’s tax bill.

However, John Doe also declared bankruptcy, which resulted in his credit card company discharging $1,500 of his credit card debt. Although this means that John Doe no longer owes the $1,500, his tax credit is reduced by that amount.

Other scenarios include reducing the basis (that is, the purchase price for tax purposes) by the amount of the forgiven debt, which would mean a larger taxable gain occurs when the property is sold.

The taxpayer must use IRS Form 982 to reduce his or her tax attributes in a specific order.

Why Does a Tax Attribute Matter?

Generally, discharged debts do not count as taxable income for borrowers. But in order to ensure that borrowers do not dramatically benefit from debt discharges, the IRS requires that the discharged debts reduce the taxpayer’s tax attributes. Tax attributes generally only surface when a person or company is bankrupt.