Recently, we wrote about when an association should consider forgiveness of an owner’s debt. Once the association decides to forgive an owner’s debt, then what? First, the amount will actually be written off to bad debt and taken off the association’s books. Second, since it is tax season (and we are all thinking about taxes), why not file a 1099-C tax form with the IRS? A 1099-C form is used to report income due to cancelled debt of more than $600.00. The IRS states that a Form 1099-C can be filed “for each debtor for whom you canceled $600 or more of debt owed to you if: 1) you are an applicable financial entity; and 2) an identifiable event occurs.” This means that the debt forgiven by an association can be treated as income and therefore, the owner would have to include that income on tax returns, as well as pay tax on that income.
Writing off bad debt and filing a 1099-C form could be advantageous to your association, but Boards should also exercise caution when considering this option. For example, if an owner’s debt has been discharged through a bankruptcy filing, the association would not have been able to collect personally from that owner on the pre-bankruptcy balance and as such, could not consider that write-off as a cancellation of debt, which would be an identifiable event per the tax code. The association should consult its legal counsel and perhaps either a tax attorney or the association’s CPA regarding the tax implications, if any, to the association for issuing a 1099-C form.
Prior to forgiving an owner’s debt, please contact legal counsel to ensure that there are no other options for an association. Additionally, turning over files to legal counsel for collection as quickly as possible leads to more successful collections outcomes for associations. If you have questions about how to deal with debt burdening your association, or about forgiveness of debt and 1099-C forms, don’t hesitate to contact our office at 303-432-9999.