Why it matters
A client who settles a loan for less than the balance may receive a Form 1099-C and owe tax on the forgiven amount. The client may qualify for an exclusion, such as insolvency or bankruptcy, but the exclusion needs to be documented.
Example
A client settles a $40,000 business loan for $25,000. The lender forgives $15,000 and issues Form 1099-C. The preparer reviews the exclusion rules and reports the taxable portion on the return.
Related terms
Questions about Form 1099-C
Is cancelled debt always taxable?
Not always. The taxpayer may qualify for an exclusion, such as insolvency, bankruptcy or a qualified principal residence exclusion. The preparer needs the facts and the supporting records.
What should the client send with Form 1099-C?
The settlement agreement, the lender's statement, the original loan documents and the records that support any exclusion. The form alone does not show why the debt was cancelled.