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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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Can an individual issue a Form 1099C for forgiven debt? A bank

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Can an individual issue a Form 1099C for forgiven debt? A bank just forgave a personal debt, all of which money was loaned to a business. Can I personally forgive the debt to the business and send out a Form 1099C for the same amount as the bank is sending me?
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

LEV :

Hi and welcome to Just Answer!
Please see instructions - www.irs.gov/pub/irs-pdf/i1099ac.pdf
Who Must File. File Form 1099-C if you are:
1.A financial institution described in section 581 or 591(a) (such as a domestic bank, trust company, building and loan or savings and loan association).
2.A credit union.
3.Any of the following, its successor, or subunit of one of the following:
a.Federal Deposit Insurance Corporation,
b.Resolution Trust Corporation,
c.National Credit Union Administration,
d.Any other federal executive agency, including government corporations,
e.Any military department,
f.U.S. Postal Service, or
g.Postal Rate Commission.
4.A corporation that is a subsidiary of a financial institution or credit union, but only if, because of your affiliation, you are subject to supervision and examination by a federal or state regulatory agency.
5.A Federal Government agency including:
a.A department,
b.An agency,
c.A court or court administrative office, or
d.An instrumentality in the judicial or legislative branch of the government.
6.Any organization whose significant trade or business is the lending of money, such as a finance company or credit card company (whether or not affiliated with a financial institution). The lending of money is a significant trade or business if money is lent on a regular and continuing basis.
So far - as an individual - you are not any of listed entities - and do not issue form 1099C,

LEV :

If however - you loaned the money to a different legal entity - and there is no way you could collect that debt - you might have a bad debt.


You definitely may deduct your bad debt without closing your corporation.


You need to be able to proof all requirements to treat that loan as a bad debt. Because you are 100% owner of that corporation - you need to be ever more précised.


To deduct a bad debt, you must have previously included the amount in your income or loaned out your cash. For a bad debt, you must show that there was an intention at the time of the transaction to make a true loan and not a contribution. If you lend money with the understanding that it may not be repaid, it is considered a true loan.


A debt becomes worthless when the surrounding facts and circumstances indicate there is no reasonable expectation of payment. To show that a debt is worthless, you must establish that you have taken reasonable steps to collect the debt. It is not necessary to go to court if you can show that a judgment from the court would be not collectible. You may take the deduction only in the year the debt becomes worthless.

Customer:

So how do I forgive a debt to a business, so that I do not have to either include it in income or reduce the basis in my home?

LEV :

For the corporation - the forgiven debt is considered as income - regardless if it was reported on 1099C or not - and should be reported as such as the tax return. If funds were used to qualified business expenses - that should not be an issue to offset this income with deductible expenses - and that fact will not result any taxable income.

LEV :

debt forgiven to you and debt that you forgive - these are two separate issues - and should be evaluated separately.

Customer:

I understand the business aspect. The business has over $500,000 in NOL carryover , so the inclusion of $375,000 in income is no problem. I want to not have to include the $375,000 of forgiven debt as either income personally or have to reduce the basis of my home.

LEV :

If that is YOUR debt which is forgiven - you generally has to include it into your income unless you may use any exemption. In case you are using exemption - and exclude the forgiven debt from YOUR taxable income - you are required to reduce your tax attributes - and depending on your situation that might be reduction of your basis or other attributes. You may not avoid both.

LEV :

If you are not able to collect the money you loaned to the corporation - that is separate issue - it might be bad debt - and could be deductible for you personally. But - that is a separate issue.

Customer:

I guess that I was hoping that if I forgave the debt to the business, that I could offset the income to me personally by having some type of bad debt deduction for the same amount. Is that possible?

LEV :

Yes - that is possible - to offset the income realized from forgiven debt with losses realized from the bad debt. But you still need to report both on your tax return.

Customer:

Would it help to file a Form 1099C to the business to help quantify what is happening? Will I be able to deduct the full amount as bad debt?

LEV :

Filing form 1099C will not change anything. Still rules for deducting bad debt are same.

LEV :

There are two kinds of bad debts - business and nonbusiness. Generally, a business bad debt is one that comes from operating your trade or business. A business deducts its bad debts from gross income when figuring its taxable income.


All other bad debts are nonbusiness. Nonbusiness bad debts must be totally worthless to be deductible. You cannot deduct a partially worthless nonbusiness bad debt.


A nonbusiness bad debt is reported as a short-term capital loss on Form 1040, Schedule D. It is subject to the capital loss limitations ($3000). A nonbusiness bad debt deduction requires a separate detailed statement attached to your return.

Customer:

I do not know the rules for deducting bad debt. If I have income of over $375,000 (including the forgiven debt), will I be able to deduct the full amount of $375,000? Or is there a limit of how much can be deducted?

LEV :

To deduct a bad debt, you must have previously included the amount in your income or loaned out your cash. For a bad debt, you must show that there was an intention at the time of the transaction to make a true loan and not a contribution. If you lend money with the understanding that it may not be repaid, it is NOT considered a true loan.

Customer:

I typed the last question before your total answer was shown. So, I am limited to $3,000 per year. I already have carryover losses from my loss on WaMU stock. It sounds like I will not be able to deduct any of the $375,000. Does that sound right?

LEV :

If that was a business bad debt (from operating your business) - it is fully deductible .against your gross income when figuring the taxable income.
If that was a nonbusiness bad debt is treated as a short-term capital loss and it is subject to the capital loss limitations ($3000) - means - it may be fully used to offset other capital gain - but if you have net capital loss - only up to $3000 may be used to offset other taxable income - and the rest is carried over to following years.

Customer:

Please clarify "business bad debt." I loaned the money to the C Corp that I own. So the loan was from me personally to a business, but I am not in the "business" of loaning money. The money was loaned to the business 5 years ago.

LEV :

It sounds as that was your personal loan - and that would be a nonbusiness bad debt...

LEV :

Please stay with me.. let me verify some references...

Customer:

So can you think of any way that I can avoid paying income tax on $375,000. Ouch!!

Customer:

Just looked at Section 166 and agree that it would be considered short term capital gain. I assume the debt forgiveness can't be classified as "capital gain."

Customer:

Sorry, I meant loss on the first sentence.

LEV :

See here - http://ranone.netopia.com/harrisoncpa/nss-folder/folder/Loans%20To%20and%20From%20Corporate%20Shareholders.htm
Generally, a business bad debt loss can be claimed if you habitually make business loans, or if your primary reason for making the loan was to protect your salary as a corporate employee. However, if the main reason for the loan was to protect your investment in the corporation, a subsequent bad debt loss is treated as a short-term capital loss.
So - there MIGHT be an option to treat the debt as a BUSINESS bad debt - but you might want to have a local CPA involved to evaluate your situation - as a business loss vs. an investment loss...
Here is a court case this matter - http://supreme.justia.com/cases/federal/us/405/93/
In determining whether a bad debt has a "proximate" relation to the taxpayer's trade or business, and thus qualifies as a business bad debt, the proper standard is that of dominant motivation, rather than significant motivation.
So - to address your last question - your only option to deduct the full amount is to treat it as a business bad debt - and that could be ONLY based on your dominant motivation - such as protecting your salary as an employee of C-corporation.

Customer:

How would I document something like that? I have loaned the business over $800,000 down through the years. It now has a negative net worth of about $480,000.

LEV :

That is not something based on a single document - but rather on interpretation of facts.
I understand that a large amount is on stake...
In simple words - if C-corporation has generated salary for you - and your dominant motivation is to protect your salary - your could treat it as a business bad debt. In case the IRS disagree with your interpretation - you might be involved in litigation and will need a tax attorney. We are in very-very gray area.
As you see - the issue is not as simple as issuing Form 1099C... I strongly suggest to engage a local CPA and provide all these information for considerations.

Customer:

OK. Thanks for your help.

LEV :

Sorry if you expected something different.

Customer:

I was hoping!!!

Customer:

I will probably use the forgiven amount to reduce the basis in my house. I might have to pay taxes on the eventual sale, but maybe I will have the money then.

LEV :

That might an option - to use form 982.

Customer:

I think that I can get most of the amount through the insolvency exclusion.

Customer:

As far as limiting the paying taxes for 2012.

LEV :

That might be the best option if you are insolvent.

Customer:

Again thanks.

LEV :

You are welcome. Sorry again...

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22966
Experience: Taxes, Immigration, Labor Relations
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Taxes, Immigration, Labor Relations