A client has debt relief income, is insolvent, and also is carrying an NOL much in excess of the debt relief. It doesn't seem to me that there is any point bothering with Form 982 instead of simply applying the COD income against the NOL. Am I missing anything?
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Evan Appelman, EA -
In general, the insolvency and bankruptcy exclusions aren't optional. I don't think that would affect any current year NOL (i.e., it would be erased either way), but if there's a previous year NOL carryforward for which this is the last available year, then it's lost.
Say there's $2000 for which 2012 is the last available year, and $1000 that can carry forward to 2013, and $2000 of canceled debt that could be excluded. If you ignore the insolvency exclusion, you'd use up the first $2K of NOL, with $1K carrying forward. But if you apply the insolvency exclusion, you can't use any of the NOL (obviously I'm over simplifying by assuming there's nothing else to apply it to) on the 2012 return, which means it expires, and you have to reduce the remaining $1K of NOL to $0.
I think. I haven't done enough with NOLs to be sure. So I welcome comments on whether this analysis is correct.
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