"tom" <tkat[at]ureach.com> wrote:

- quote -

How about this - have the business write it off as a bad
debt?

This won't spank the ex-employee so if that is what you want
to do this won't work. But it will allow the business to
claim a deduction for the money it disbursed and it will be
tax deductible and the partners will benefit.

Ah, I see what's coming next - client business is on the
cash basis of accounting so how can we claim a bad debt?
Simple, just because the cash basis is used doesn't mean a
bad debt doesn't exist, check the rules for deducting bad
debts.

BUT please, make sure a good faith effort has been made to
attempt collection. It isn't really a bad debt until it
can't be collected. For $10K it would be worthwhile to have
an attorney send a demand letter.

Gene E. Utterback, EA

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Employee was terminated. Employee had loan due to company.
Loan was initated 3 years ago. Purpose of the loan was to
assist employee in purchasing residence. Balance of loan was
in excess of $10K. Ex Employee is not a related party. Ex
employee is not insolvent but would refuse to repay loan &
won't be happy he has to pay taxes on it either way.

I have had a number of suggestions as to how to handle this.

1)Issue a W-2c. Reasoning: Loan was not documented in
writing (verbal understanding only) although it was carried
as loan on financials. No repayments had been made back to
the company. Problem: Company will have to pay penalties
and interest on back taxes related to filing a corrected
W-2. Ex employee will suffer as well. Also suggested to
included the loan on the current year W-2 and not go back
and file a w-2c.

2)Issue a 1099M. Reasoning: Same as #1 but avoid penalties
and interest on the front-end at least & hope the issue
never comes up. Realize this is not technically correct

3)Issue a 1099C. Reasoning: Forgiveness of debt. This
seems the way to go but it appears a 1099C is only used by
financial institutions or governmental agencies. If it can
be used the 1099C would be the less aggravating to the
ex-employee

4)Have the owners write it off and classify it as parnter's
distributions. Again this is not technically correct and
obviously the owners get no tax deduction.

Does anyone have any other suggestions or an opinion as to
the best approach? Thanks

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