Form 1099-A is published by the Internal Revenue Service for banks and other commercial lenders to report a discharge of secured indebtedness by the lender to the borrower. The lender is able to then claim the forgiven secured debt as a deductible business loss for tax purposes. The 1099-A also has tax implications for the recipient of the forgiven debt.
A secured debt is a loan that is backed by some collateral, usually a home or a vehicle. Generally, if the borrower fails to repay the loan according to the terms in the lending contract, the lender forecloses on the loan and repossess the collateral property. An IRS form 1099-A is issued when a secured debt is forgiven by a lender, but not when an unsecured debt is discharged by a creditor.
In some circumstances, a commercial lender may forgive the debt of a borrower, which zeros out the debt. As a result, the borrower does not have to repay the remaining value of the loan. Lenders may forgive debts if the borrower is on the brink of bankruptcy so that she can continue to pay some of the loan.
Tax Consequences for the Borrower
As a general rule, a loan is not considered income for tax purposes since it is not a permanent transfer of wealth, but rather a temporary one. However, if the funds are no longer expected to be repaid by the borrower, then the IRS considers the money to be realized income. Therefore if the lender forgives a debt, it is treated as taxable income of the borrower the year the debt is forgiven because he has accrued money without having an obligation to repay it.
Tax Consequences for the Lender
The lending institution is permitted to deduct the value of the unpaid portion of the loan from its income taxes during the tax year the loan was forgiven, as it constitutes a business loss. However, in order to qualify for the deduction, the institution must issue an IRS form 1099-A to the borrower with a copy to the IRS.
- Internal Revenue Service: Instructions for Forms 1099-A and 1099-C
- MSN -- Money: Why Lenders Might Forgive Your Debt; Liz Pulliam Weston
- Internal Revenue Service: Topic 160 -- Form 1099-A (Acquisition or Abandonment of Secured Property) and Form 1099-C (Cancellation of Debt)
- Internal Revenue Service. "Topic No. 431 Canceled Debt – Is It Taxable or Not?" Accessed Jan. 20, 2020.
- Internal Revenue Service. "Instructions for Forms 1099-A and 1099-C (2020)." Accessed Jan. 20, 2020.
- Internal Revenue Service. "What's New - Estate and Gift Tax." Accessed Jan. 20, 2020.
- Internal Revenue Service. "Publication 4681: Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals)." Accessed Feb. 14, 2020.
- Internal Revenue Service. "Home Foreclosure and Debt Cancellation." Accessed Jan. 20, 2020.
- Internal Revenue Service. "Publication 970 (2018), Tax Benefits for Education." See: 5. Student Loan Cancellations and Repayment Assistance. Accessed Jan. 20, 2020.
Kevin Owen has been a professional writer since 2005. He served as an editor for the American Bar Association's "Administrative Law Review." Owen is an employment litigator in the Washington D.C. metropolitan area and practices before various state and federal trial and appellate courts. He earned his Juris Doctor from American University.