Finance

Have Finance Questions? Ask a Financial Expert Online.

Ask an Expert,
Get an Answer ASAP!

Finance
This answer was rated:

is creditor required to report income

is a creditor required to...
is a creditor required to report on schedule c the interest that is part of a bad debt cancellation (1099c)

i resolved the net operating loss question previously posted
Show More
Show Less
Ask Your Own Finance Question
Answered in 4 days by:
10/11/2011
CGCPA
CGCPA, CPA
Category: Finance
Satisfied Customers: 3,820
Experience: 40+ years experience in taxes and financial planning
Verified

Welcome to Just Answer. I am here to help you resolve your tax and finance concerns. Please feel free to ask anytime you need extra help.

First we need to get the concept of creditor/debtor straight so we are speaking the same language and avoid confusion and misunderstanding.

A creditor is any party to whom money is owed. A debtor is the party owing the money. Thus, for example, if you borrow money from a bank to purchase an automobile the bank is the creditor and you are the debtor.

Form 1099C is issued by a creditor to a debtor when an obligation of the debtor to the creditor is canceled or forgiven. With certain exclusions being permitted by law, the debtor must reflect the cancellation of debt on his/her tax return. This is done on Federal form 1040, line 21 (of the debtor)and not on the debtor's Schedule C. The creditor does not recognize an income from this but does recognize a business loss to the extent of the amount of the obligation which is forgiven. Here is a bit of information on this from the IRS. You can read more about this at the IRS web site www.irs since there are specific rules pertaining to home mortgage forgiveness, business debt forgiveness and other forgiven debts.

Topic 431 - Canceled Debt - Is it
Taxable or Not?

In general, if you are liable for a debt that is canceled, forgiven, or
discharged, you must include the canceled amount in gross income unless you meet
an exclusion or exception. However, canceled or forgiven debt is not considered
income if it is intended as a gift or bequest.

A debt includes any indebtedness for which you are personally liable or for
which you are liable only to the extent of the property securing the debt.
Cancellation of all or part of a debt that is secured by property may occur
because of a foreclosure, a repossession, a voluntary return of the property to
the lender, abandonment of the property, or a principal residence loan
modification. You must report any taxable amount of a debt that is canceled, as
ordinary income from the cancellation of debt, on Form 1040 or Form 1040NR and
associated sub-schedules, as advised in IRS Publication 4681, Canceled Debts,
Foreclosures, Repossessions, and Abandonments (for Individuals)
.

Caution: If
your debt is secured by property and that property is taken by the lender in
full or partial satisfaction of your debt, you will be treated as having sold
that property and may have a reportable gain or loss. The gain or loss on such a
deemed sale of your property is a separate issue from whether any canceled debt
also associated with that same property is includable in gross income. See IRS
Publication 544, Sales and Other
Dispositions of Assets
, for detailed information on reporting gain or
loss from repossession, foreclosure or abandonment of property.

If a federal government agency or an applicable financial entity cancels or
forgives a debt you owe of $600 or more, you should receive a Form 1099-C (PDF), Cancellation of
Debt
, showing amounts and other information relating to the
cancellation. The amount of canceled debt is shown in Box 2 of the form.
Taxpayers may also receive a Form 1099-A
(PDF), Acquisition or
Abandonment of Secured Property
.

Canceled Debts that meet the requirements for any of the following exceptions
or exclusions are not taxable.

Canceled Debt
that Qualifies for Exception to Inclusion in Gross Income:


  1. Amounts specifically excluded from income by law such as gifts or bequests
  2. Cancellation of certain qualified student loans
  3. Canceled debt that if paid by a cash basis taxpayer is otherwise deductible
  4. A qualified purchase price reduction given by a seller

Canceled Debt
that Qualifies for Exclusion from Gross Income:


  1. Cancellation of qualified principal residence indebtedness
  2. Debt canceled in a Title 11 bankruptcy case
  3. Debt canceled due to insolvency
  4. Cancellation of qualified farm indebtedness
  5. Cancellation of qualified real property business indebtedness

The exclusion for "qualified principal residence indebtedness," provides
canceled debt tax relief for many American home owners involved in the mortgage
foreclosure crisis currently affecting much of the country. The exclusion allows
taxpayers to exclude up to $2,000,000 ($1,000,000 if married filing separately)
of "qualified principal residence indebtedness".

Generally, if you exclude canceled debt from income under one of the
exclusions listed above, you must also reduce your tax attributes (certain
credits, losses, and basis of assets) by the amount excluded. You must file Form 982 (PDF), Reduction of Tax
Attributes Due to Discharge of Indebtedness (and Section 1082 Basis
Adjustment)
, to report the exclusion and the corresponding reduction of
certain tax attributes.

Refer to Publication
4681
, Canceled Debts,
Foreclosures, Repossessions, and Abandonments (for Individuals)
, for
more detailed information regarding taxability of canceled debt, how to report
it, and related exceptions and exclusions. Additional information can also be
found in Publication 525, Taxable and
Nontaxable Income
.

Ask Your Own Finance Question
Customer reply replied 6 years ago
just got back and saw you responded. i think i already figured it out but lets confirm...

i as creditor wrote off on a 1099c for 2011 roughly 146K of which 63,632 is interest, abiet not received, yet it would have been if debtor had paid. my understanding from call to irs today is that i as schedule c filer can only write off what was included as income

do i include as income. this is a business expense and i am legally allowed to issue the 1099c.

i wrote the bad debt off the schedule c . do i write the income in the same way

The principal (and any interest that was previously reported as income but not received) is a bad debt. If this was a loan to/for business purposes it is a business bad debt. Otherwise it is a personal bad debt. Business bad debts can only be deducted on Schedule C if this is the nature of your business (making loans). Otherwise, both bad debt types must be claimed as itemized deductions.

Interest received on the loan would have been required to be reported on Schedule B (again, unless this is you business). Yes, you can issue a 1099C but unless your business is a financial institution the issuance is not required.

Here is a piece from the IRS on bad debts and their treatment. It will guide you in gathering the records to support the proper treatment of the bad debt.

Topic 453 - Bad Debt
Deduction

If someone owes you money that you cannot collect, you may have a bad debt.
For a discussion of what constitutes a valid debt, refer to Publication 550, Investment Income
and Expenses
, and Publication
535
, Business Expense.
To deduct a bad debt, you must have previously included the amount in
your income or loaned out your cash. If you are a cash basis taxpayer, you may
not take a bad debt deduction for money you expected to receive but did not (for
example, for money owed to you for services performed, or rent) because that
amount was never included in your income. For a bad debt, you must show that
there was an intention at the time of the transaction to make a loan and not a
gift. If you lend money to a relative or friend with the understanding that it
may not be repaid, it is considered a gift and not a loan.

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.

The following are examples of business bad debts (if previously included in
income):


  • Loans to clients and suppliers
  • Credit sales to customers, or
  • Business loan guarantees

A business deducts its bad debts from gross income when figuring its taxable
income. Business bad debts may be deducted in part or in full. You can claim a
business bad debt using either the specific charge-off method or the
nonaccrual-experience method.

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 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 uncollectible. You may take the deduction only in the
year the debt becomes worthless. You do not have to wait until a debt is due to
determine whether it is worthless.

A nonbusiness bad debt is reported as a short-term capital loss in Part 1 on
Form 1040, Schedule D (PDF). It is
subject to the capital loss limitations. A nonbusiness bad debt deduction
requires a separate detailed statement attached to your return.

For more information on nonbusiness bad debts, refer to Publication 550, Investment Income
and Expenses
. For more information on business bad debts, refer to Publication 535, Business
Expenses
.

Ask Your Own Finance Question
Customer reply replied 6 years ago
sorry. last -- can i amend prior return and inlude where the interest would have been due? example....investor borrowed for real estate property. paid interst only 2 years then stopped paying. i cancelled debt in same year in one scenerio--'10 i could include and then write off.. in '11 last issue with 1099c's i have not yet included income since no taxes are yet due--but the write off is large and i want to issue 1099c before debtor files bgankruptcy . am i allowed to write off if i inclued in my '11 taxes
You can go back and amend the earlier returns and that would be correct. It will also provide greater deduction for the 2011 returns. However, you should also take two points into account. Amending the returns may cost you additional taxes and this would result in interest and penalties being charged. It is also necessary to take into account the income you will show on your 2011 return. Will this have a greater benefit than claiming the bad debt loss in an amended 2010 return?
CGCPA
CGCPA, CPA
Category: Finance
Satisfied Customers: 3,820
Experience: 40+ years experience in taxes and financial planning
Verified
CGCPA and 87 other Finance Specialists are ready to help you
Ask your own question now
Ask CGCPA Your Own Question
CGCPA
CGCPA
CGCPA, CPA
Category: Finance
Satisfied Customers: 3,820
3,820 Satisfied Customers
Experience: 40+ years experience in taxes and financial planning

CGCPA is online now

A new question is answered every 9 seconds

How JustAnswer works:

  • Ask an ExpertExperts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional AnswerVia email, text message, or notification as you wait on our site. Ask follow up questions if you need to.
  • 100% Satisfaction GuaranteeRate the answer you receive.

JustAnswer in the News:

Ask-a-doc Web sites: If you've got a quick question, you can try to get an answer from sites that say they have various specialists on hand to give quick answers... Justanswer.com.
JustAnswer.com...has seen a spike since October in legal questions from readers about layoffs, unemployment and severance.
Web sites like justanswer.com/legal
...leave nothing to chance.
Traffic on JustAnswer rose 14 percent...and had nearly 400,000 page views in 30 days...inquiries related to stress, high blood pressure, drinking and heart pain jumped 33 percent.
Tory Johnson, GMA Workplace Contributor, discusses work-from-home jobs, such as JustAnswer in which verified Experts answer people’s questions.
I will tell you that...the things you have to go through to be an Expert are quite rigorous.

What Customers are Saying:

I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response...

T.G.WMatteson, IL

I WON!!! I just wanted you to know that your original answer gave me the courage and confidence to go into yesterday's audit ready to fight.

BonnieChesnee, SC

Great service. Answered my complex tax question in detail and provided a lot of additional useful information for my specific situation.

JohnMinneapolis, MN

Excellent information, very quick reply. The experts really take the time to address your questions, it is well worth the fee, for the peace of mind they can provide you with.

OrvilleHesperia, California

Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help.

Mary C.Freshfield, Liverpool, UK

This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!!

AlexLos Angeles, CA

Thank you for all your help. It is nice to know that this service is here for people like myself, who need answers fast and are not sure who to consult.

GPHesperia, CA

< Previous | Next >

Meet the Experts:

Rakhi Vasavada

Rakhi Vasavada

Financial and Legal Consultant

2,608 satisfied customers

Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years

Megan C

Megan C

Certified Public Accountant (CPA)

2,218 satisfied customers

Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level

Manal Elkhoshkhany

Manal Elkhoshkhany

Tutor

1,919 satisfied customers

More than 5000 online tutoring sessions.

JKCPA

JKCPA

CPA

844 satisfied customers

Bachelors degree and CPA with Accounting experience.

Eric

Eric

Financial Manager

559 satisfied customers

Loan servicing, counseling and real estate expert. Foreclosure Expert and Financial Planner.

R. Klein, EA

R. Klein, EA

Accountant

480 satisfied customers

TurboTax Expert. QuickBooks Certified Pro Advisor

Dimitry K., Esq.

Dimitry K., Esq.

Attorney

332 satisfied customers

NASD Licensed Rep, 1997-2001, Business Attorney

< Previous | Next >

Related Finance Questions
I'm getting ready to get a home equity line of credit. I own
I'm getting ready to get a home equity line of credit. I own my home outright and have no other liens. I plan to get about $ 50,000 line of credit, which is about 30% of home value. I plan to use proc… read more
Chad CFP ®
Chad CFP ®
Certified Financial Planner(R), Pro
Master\u0027s Degree
723 satisfied customers
I have a Texas LLC and we sell agricultural parts for
I have a Texas LLC and we sell agricultural parts for tractors, we have a contract manufacturer make our proprietary parts, then sell them to farmers. Farmers are obviously tax exempt, but are we also… read more
abci168
abci168
Principal
27 satisfied customers
Have a sub s corp rental properties fully depreciated wish
Have a sub s corp rental properties fully depreciated wish to do a joint venture not a sale or transfer of property.. How can this be done without triggering capital gains? … read more
LEV
LEV
Retired
Bachelor's Degree
14,896 satisfied customers
I have a looming $3000 in s/t cap gain & 34,000 in l/t cap
I have a looming $3000 in s/t cap gain & 34,000 in l/t cap gains & $100k in cash from stock sales.Best way to reduce the tax. Can't I take l/t gains over time. My income this year's was about 35K. I a… read more
Chad CFP ®
Chad CFP ®
Certified Financial Planner(R), Pro
Master\u0027s Degree
723 satisfied customers
My wife has a life insurance policy taken out in 1951 by her
my wife has a life insurance policy taken out in 1951 by her parents. it was from the Worcester county institution for savings in Worcester, ma. … read more
NPVAdvisor
NPVAdvisor
CFP Licensee and Practitioner
Master's Degree
180 satisfied customers
We are entering into a 5-year lease for our small business
Hello! We are entering into a 5-year lease for our small business and trying to properly account for the leasehold improvements in QB (i.e. architect fees, permit fees, construction costs, and equipme… read more
PDtax
PDtax
Owner
Master\u0027s Degree
1 satisfied customers
I inherited my father's IRAs. I have accounts with Fidelity
I inherited my father's IRAs. I have accounts with Fidelity and Schwab. One of my Schwab accounts is titled Inherited; the other is listed as a Roth. The Fidelity account is listed as an IRA. My quest… read more
LEV
LEV
Retired
Bachelor's Degree
14,896 satisfied customers
What is the difference in payments and total interest on a
What is the difference in payments and total interest on a car loan total of $32,000.00 paid off in three years? Interest rate 4.99% vs 2.99%… read more
Chad CFP ®
Chad CFP ®
Certified Financial Planner(R), Pro
Master\u0027s Degree
723 satisfied customers
How to negotiate with auto insurance (Progressive) the
how to negotiate with auto insurance (Progressive) the settlement prince on their offer to total my vehicle after the accident. I see only two vehicles of the exact same kind for sale by the dealers o… read more
Barbara
Barbara
Enrolled Agent, Paralegal
3,458 satisfied customers
I currently have a 20 year home equity loan....i'm looking
I currently have a 20 year home equity loan....i'm looking to lower the monthy payments doing a refi HARP loan in Pennsylvania...is that possible with no appraisal?… read more
Chad CFP ®
Chad CFP ®
Certified Financial Planner(R), Pro
Master\u0027s Degree
723 satisfied customers
I am a 2 person LLC (partnership) with only 2 part time
I am a 2 person LLC (partnership) with only 2 part time employees (15 hours per week each) and wanted to know what would be the best way to contribute to a retirement plan for the owners only?… read more
LEV
LEV
Retired
Bachelor's Degree
14,896 satisfied customers
I am an international student in Louisiana. I have been here
I am an international student in Louisiana. I have been here since 2013 and have NOT filed taxes at all. Do I have to wait until next year's tax season to file taxes for all my past years, or can I do… read more
Barbara
Barbara
Enrolled Agent, Paralegal
3,458 satisfied customers
I am about to enter a settlement for a sizable amount. For
I am about to enter a settlement for a sizable amount. For this example lets use $200k, 30% will go to my lawyer and 40% to tax leaving about $60k over. The payment will be made to the lawyers trust t… read more
Chad CFP ®
Chad CFP ®
Certified Financial Planner(R), Pro
Master\u0027s Degree
723 satisfied customers
How can we use SBA loan or American bank credit to expand
How can we use SBA loan or American bank credit to expand internationally? 1) for same business segments as we have in USA 2) Totally unrelated business segments than we have in USA?… read more
Barbara
Barbara
Enrolled Agent, Paralegal
3,458 satisfied customers
I at a California S Corp. due to an ERP glitch a large
I at a California S Corp. due to an ERP glitch a large amount of consignment inventory was not recording in our GL. How would I record this inventory now? How will it affect taxes?… read more
taxmanrog
taxmanrog
Master\u0027s Degree
698 satisfied customers
What costs can be capitalized as leasehold improvements? Can
What costs can be capitalized as leasehold improvements? Can architect and engineer fees be capitalized?… read more
CGCPA
CGCPA
CPA
3,820 satisfied customers
How can I obtain Oil Pension Checks? I need to know the Best
JING sent me a message from Lombardi Publishing Corporation.… read more
taxmanrog
taxmanrog
Master\u0027s Degree
698 satisfied customers
My daughter has a small Roth 3K.....she wants to get a
My daughter has a small Roth 3K.....she wants to get a "traditional" IRA thru her bank.....Can she have both or must she convert the Roth… read more
Chad CFP ®
Chad CFP ®
Certified Financial Planner(R), Pro
Master\u0027s Degree
723 satisfied customers
Disclaimer: Information in questions, answers, and other posts on this site ("Posts") comes from individual users, not JustAnswer; JustAnswer is not responsible for Posts. Posts are for general information, are not intended to substitute for informed professional advice (medical, legal, veterinary, financial, etc.), or to establish a professional-client relationship. The site and services are provided "as is" with no warranty or representations by JustAnswer regarding the qualifications of Experts. To see what credentials have been verified by a third-party service, please click on the "Verified" symbol in some Experts' profiles. JustAnswer is not intended or designed for EMERGENCY questions which should be directed immediately by telephone or in-person to qualified professionals.

Disclaimer: Information in questions, answers, and other posts on this site ("Posts") comes from individual users, not JustAnswer; JustAnswer is not responsible for Posts. Posts are for general information, are not intended to substitute for informed professional advice (medical, legal, veterinary, financial, etc.), or to establish a professional-client relationship. The site and services are provided "as is" with no warranty or representations by JustAnswer regarding the qualifications of Experts. To see what credentials have been verified by a third-party service, please click on the "Verified" symbol in some Experts' profiles. JustAnswer is not intended or designed for EMERGENCY questions which should be directed immediately by telephone or in-person to qualified professionals.

Show MoreShow Less

Ask Your Question

x