Cancellation of debt by the creditor in exchange of services rendered by the debtor taxable or not

Cancellation of debt generally occurs: Under Generally Accepted Accounting Principles (GAAP), the debt forgiven was considered a liability; or Where the debt forgiven constitutes a quid pro quo or incentive that would be taxable under Pennsylvania personal income tax law if it had been paid to the debtor in cash or in property.

In order to cancel or discharge a debt, the debtor must be relieved of his or her payment obligation. For effecting the cancellation of debt, a possibility of enforcement of payment should not exist. Cancellation of debt income exists when:

Negotiating cancellation of debt with a creditor can be challenging. Most creditors are not willing to cancel individual debts as interest and fees on approved credit is the main source of income influencing their bottom line. However, some creditors do include provisions in their credit agreements for canceled debt.