As an accounting major in college, I quickly learned all of the complicated parts of the accounting cycle. I discovered how to input the details of business transactions into a computerized accounting system. At the end of an accounting cycle, such as a month, I became experienced with calculating the revenue for the period. If you’re starting a new business, determining an accurate amount of revenue for each accounting cycle is crucial. You must know how much profit you’re making each accounting period in order to be successful in the long-term. On this blog, you will discover how an experienced accountant can help you keep track of your revenue.
It's estimated that at least 35% of the population has at least one debt in collections. Debts that reach this stage have gone unpaid for quite some time. In an effort to collect some payment towards the debt, creditors may offer a settlement. With a settlement offer, you agree to pay a portion of the debt and the creditor agrees to forgive the leftover balance, but this doesn't mean the balance is wiped away. A forgiven debt might come back to haunt you when you file your taxes.
Tax Assessments for Debt Forgiveness
When you get ready to file your taxes, the IRS could actually hold you liable for the unpaid portion of the debt. In order to understand this, you first need to get an idea of how businesses file taxes. The IRS collects taxes based on the income earned for a business. When you only pay a portion of the debt owed to a creditor, this counts as a loss of income on their part.
When their income declines, so does their tax liability. When a business's tax liability is reduced, the IRS is unable to collect. Since they can't go after the company for money they didn't actually receive, they sometimes come after you.
Reporting of Forgiven Debt
After you make your settlement payment, the business is required to report this information to the IRS. This is generally done through the filing of a 1099-C Form, which is a way for the business to present the IRS with evidence of their loss of income. If the amount of forgiven debt on the form is greater than $600, the IRS will classify this as gained income and require that you pay income taxes.
Generally, only if a debt was included as part of a bankruptcy discharge can you avoid being held responsible for taxes on forgiven debts that exceed $600.
Protecting Yourself
If you agree to a settlement offer, make certain you get a copy of the 1099-C form in your hand. You will need to include information from this form as part of your income when you file your taxes. If you fail to report this information to the IRS, you could end up owing more money to the IRS in the form of penalties and interest for unpaid taxes.
An accountant can assist you with finding out exactly what type of effect your forgiven debts will have on your taxes and ensure you are filing this information correctly. Contact a group like Cowan Digiacomo & Associates to learn more.
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