Canceled Debt: Interest in Box 3
Separate interest from principal.
Estimated reading time: 1 minute
On a 2025 U.S. Form 1099-C, box 3 interest is inside box 2.
Separate the amounts
Fictional 2025 cancellation; cash-method sole proprietor: box 2 is $6,000, including $1,000 box 3 interest. Assume all the interest would have been deductible if paid in 2025. The other $5,000 is principal.
Under IRS Publication 4681, the deductible-debt exception applies to the $1,000. It is not a payment or deduction. Analyze the $5,000 principal separately.
Check the facts
If interest would not have been deductible, this exception would not remove it. Do not add box 3 to box 2. Check business use, deduction limits and other exceptions or exclusions with a tax professional.
Returned Purchase, Negative Points?
Separate the credit from points.
Medical Collections: Which Balance Counts?
Check the initial and current balances.