What this line means
The amount of excluded canceled debt you elect to apply against depreciable property basis under Section 108(b)(5). This is an election — it is not required. When you make this election, you skip the standard attribute reduction order entirely and reduce depreciable property basis first, before touching NOLs, credits, or capital losses. Any excluded amount not absorbed by depreciable property basis then reduces the remaining attributes in the standard order.
Does this apply to you?
- You excluded canceled debt from income and want to preserve your NOLs, credit carryovers, and capital losses
- You own depreciable property (buildings, machinery, equipment, vehicles used in business) with sufficient basis
- You prefer to take smaller depreciation deductions in future years rather than lose NOLs or credits now
- You are willing to accept higher taxable gain when you eventually sell the depreciable property
Easy to overlook
This election must be made on a timely filed return (including extensions) The Section 108(b)(5) election to reduce depreciable property basis first is made by checking the appropriate box and completing line 10b on the Form 982 attached to your original or timely-filed return. If you miss the deadline, you default to the standard ordering rules and may lose valuable NOLs or credits that the election would have preserved. 1 IRS Form 982 Instructions — Line 10b
Reducing depreciable basis lowers your future depreciation deductions When you reduce the basis of depreciable property, your annual depreciation deduction shrinks for the remaining recovery period. This increases your taxable income in every future year until the property is fully depreciated or sold. For a rental building with 20 years of depreciation remaining, a $50,000 basis reduction costs $2,500 per year in lost depreciation. Weigh that against the immediate value of preserving your NOLs. 2 IRS Publication 4681 — Canceled Debts, Foreclosures, Repossessions, and Abandonments
Watch out for this
Making the election without comparing the long-term cost. Preserving a $30,000 NOL sounds attractive, but if reducing depreciable basis means $3,000 per year of higher taxable income for the next 10 years (totaling $30,000), you have not saved anything — you have just shifted when you pay the tax. Run a multi-year projection before choosing this election over the standard reduction order.
Footnotes
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IRS Form 982 Instructions, Line 10b. https://www.irs.gov/instructions/i982 ↩
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IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, Chapter 1. https://www.irs.gov/pub/irs-pdf/p4681.pdf ↩