Form 1099-C Reporting Requirements
The current financial crisis has given rise to a growing number of entities that are forgiving loans and reporting cancellation of debt to borrowers who defaulted on their loans. There are many questions that may arise with respect to reporting requirements including how and who should report this type of income. Form 1099-C, Cancellation of Debt, is used to report this discharge of debt.
Filing Requirements
In accordance with Internal Revenue Code (“IRC”) §6050P, discharges of indebtedness of $600 or more during any calendar year, must be reported to the Internal Revenue Service (“IRS”) on Form 1099-C. Entities that must file Form 1099-C include financial institutions, credit unions, the Federal Deposit Insurance Corporation or any organization whose significant trade or business is the lending of money. However, the IRC does not state that these are the only entities that can file such returns. IRS Service Center Advice (SCA) 1998-020 states that “an individual or entity not required to file a Form 1099-C under §6050P of the IRC may nevertheless voluntarily file the form.” Such reporting may encourage voluntary tax compliance and proper gross income inclusions now and in the future.
A copy of Form 1099-C and its instructions can be accessed at the healthcare services section of our firm’s website.
Other forms can be used to report debt cancellation if the loan is between an employee and an employer or and independent contractor and an entity. If an employer forgives debt of an employee, the employer must report the discharge of debt on the employee’s Form W-2. Necessary payroll tax withholding in accordance with the employee’s Form W-4 should also be considered when an employer cancels an employee’s debt. If an entity forgives the debt of an independent contractor, the entity must report the discharge on Form 1099-MISC in box 7 as nonemployee compensation. It should be noted that this income would be classified as nonemployee compensation, not as forgiveness of debt.
When Debit Is Canceled
Debt is considered canceled on either an identifiable date that an event occurs or the date of actual discharge, if earlier.
The following are identifiable event codes that would be utilized for reporting in box 6 of Form 1099-C:
- A – Discharge in Bankruptcy under Title 11.
- B – Judicial debt relief which makes a debt unenforceable in receivership.
- C – Statute of limitations or expiration of deficiency period.
- D – Foreclosure election.
- E – Debt relief from probate or similar proceeding.
- F – By agreement between creditor and debtor (e.g. short sale).
- G – Decision or policy to discontinue collection.
- H – Expiration of nonpayment testing period (applies only to entities who must file).
- I – Other actual discharge before identifiable event.
Nonpayment Testing Period
The testing period, which applies only to entities that must file for expiration of nonpayment (Code H in the “When Debt is Canceled” section above), is a thirty-six month period ending on December 31, plus any time when the creditor was prevented from collection activity during bankruptcy proceedings or similar state proceedings. A creditor can rebut the occurrence of an identifiable event if (1) the creditor or third party collector, has engaged in significant bona-fide collection efforts (does not include nominal action such as automated mailings) during the twelve-month period preceding December 31 or (2) facts and circumstances exist on January 31 of the end of the thirty-six month period that would indicate that the debt was not canceled.
Exceptions
Reporting of the cancellation of debt is not required in the following instances:
- Certain bankruptcies, unless the debt was incurred for business or investment purposes.
- Interest is not required to be reported, however, if you choose to report interest as part of canceled debt reported in box 2, interest must be separately stated in box 3.
- Nonprincipal amounts, including penalties, fines, fees and administrative costs.
- Reporting for foreign debtors when certain factors apply.
- Related parties unless specifically transferred to avoid reporting.
- Release of a debtor if other debtors are liable for the full remaining amount.
- Guarantor or surety even if demand for payment is made to the guarantor.
- Seller financing extending credit for non-financial goods or services.
Conclusions
Form 1099-C reporting requirements only mandate that a small number of entities file the form but the application of the form is much greater. Any individual or entity can file the form voluntarily to ensure tax compliance by all parties. This is becoming more important as more entities are forgiving debts now more than ever.
How Can We Help?
For questions or to contact a member of our Healthcare Services Group, fill out the form below.