A type of loss or tax credit that must be reduced as a result of the exclusion of debt cancellation from a taxpayer's gross income. Tax attributes are adjusted when a taxpayer declares bankruptcy.
Tax attributes include net operating losses and carryovers, general business credit carryovers, alternative minimum tax credit carryovers, capital loss and foreign tax credit carryovers.
Taxpayers who are forgiven debts as a result of bankruptcy do not have to include the forgiven debt as income, but certain tax attributes must be reduced by an amount proportionate to the amount of debt that has been forgiven.
For example, if $5,000 in debt was forgiven, then the taxpayer could elect to have the basis of his/her rental property reduced by $5,000 and defer the tax until the property is sold. If the property is sold for a gain, then $5,000 of that gain will be taxed as ordinary income.
