What is a 1099c?
A 1099-C reflects the amount of debt that was cancelled or forgiven by the creditor. Generally, it’s taxable income to the recipient. However, there are exceptions. If you’ve settled with the creditor and the creditor considers the amount paid in full, the difference should not be income to the debtor. Make sure at the time of settlement that’s understood. The creditor has the right to refuse, but they generally don’t.
If interest is included in the canceled debt, the amount of interest may be includible as income. That depends on whether or not the interest would be deductible if it was paid. If you’re a stockholder in a corporation and the corp forgives the debt, then it’s dividend income to the shareholder. If you’re a shareholder & you cancel debt owed to you by the corporation, it’s not considered income because it’s recorded as a capital contribution on the corporation’s books.
Certain student loan forgiveness is not taxable if the following condition applies: if there is an agreement whereby the student works for a predetermined, agreed to period of time in exchange for the cancellation of debt.
What if I get a 1099c?
Another situation involves a price adjustment after the fact. If the price of an item is reduced subsequent to the purchase and the corresponding debt is reduced, that reduction is not income to the purchaser. Instead, the debt reduction is an adjustment to the basis of the property. If you aren’t personally liable for the debt (a non-recourse loan), you may have a gain or loss if the debt is canceled or forgiven as part of a repossession or foreclosure of the property attached to the debt.
There are specific exclusions of canceled debt: if it’s canceled in a Chapter 11 bankruptcy or when you are insolvent. Form 982 addresses how to report the exclusion of such forgiveness. IRS Publications 334, 544 & 908 are sources of more information.
If it sounds confusing, and this one is a fairly complicated topic, please give The CPA Nerds a call at (586) 468-0200 or fill out our contact form below to discuss both it and any other appropriate tax forms you may be encountering this upcoming tax season.