IRS Publication 525 — Taxable and Nontaxable Income
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See Pub. 4681 for more information. 20 Publication 525 (2025)
Stockholder debt. If you’re a stockholder in a corporation and the corporation cancels or forgives your debt to it, the canceled debt is a constructive distribution that is generally dividend income to you. For more information, see Pub. 542.
If you’re a stockholder in a corporation and you cancel a debt owed to you by the corporation, you generally don’t realize income. This is because the canceled debt is considered as a contribution to the capital of the corporation equal to the amount of debt principal that you canceled.
Repayment of canceled debt. If you included a canceled amount in your income and later pay the debt, you may be able to file a claim for refund for the year the amount was included in income. You can file a claim on Form 1040-X if the statute of limitations for filing a claim is still open. The statute of limitations generally doesn’t end until 3 years after the due date of your original return.
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