This article is for general information and should not be construed as tax advice. Readers are strongly encouraged to consult their tax adviser regarding their individual tax situation. Is SBA debt forgiveness taxable?
There is no doubt about it: the negotiation of a settlement of SBA loan can be challenging.
These days, lenders are so overwhelmed due loans that it may take an act of Congress to get them to even return your phone call. Then, when they do return your call, you are asked to complete a series of costly and confusing forms.
Once you return this information, it is likely that your first attempt at a settlement offer will be summarily rejected. From there, you negotiate, fighting tooth and nail to get a deal done.
Finally, after weeks or months of mind-numbing, energy-sapping negotiation, an agreement is made. You send them a check, and finally breathe a sigh of relief. After all, the situation is now over and behind you right? Well, not exactly.
At least not according to people from the Internal Revenue Service”. Debt forgiveness, you see, is considered taxable income. Why? In a word, if someone gives you money and you do not have to pay, it is taxable.
Just as you have to pay taxes on wages for employment. Part of the reason for debt forgiveness being taxable is because it would create a huge loophole in the tax code. In theory, your boss may “lend” money every 2 weeks, and at the end of the year, they could forgive and none of it would be taxable. I’ve had clients ask me to try to negotiate the taxability of debt relief.
Unfortunately, no lender (including SBA) has the ability to do such a thing.
Just like your employer is required to send Form W-2 for you every year, the lender is required to send 1099 forms to all borrowers who have had debt forgiven.
That said, simply because lenders are required to send 1099’s does not mean that you personally will automatically be hit with a huge tax bill. Why? In most cases, the borrower is a corporation, and you are just a personal guarantor.I know that some lenders do not send 1099’s to the borrower.
The impact of 1099 on your personal situation will vary depending on the type of entity is the borrower (C-Corp, S-Corp, LLC, etc.). Most CPAs will be able to explain how a 1099 would show.
Although I can not tell you the specific impact that the cancellation of the SBA debt will have on you. The purpose of my article is to really fair say that the loan forgiveness could have tax consequences that a borrower should consider so they can make the most informed decision possible.
**author is not an accountant or tax expert.