Question: An employee left our company in 2012. While he worked here, he had taken out a loan from the company and he signed a promissory note. The problem is that the company was sold in 2013, with the outstanding loan on the books. Our new employer just canceled the loan. How do we report this canceled loan? On a W-2, since the loan arose in the course of employment? Or on a 1099-MISC form, since he’s no longer an employee?
Answer: Neither a W-2 nor a 1099-MISC form is appropriate in this situation. The forgiven loan isn’t, which is reported on a W-2, or nonemployee compensation, which is reported on a 1099-MISC.
Instead, since the loan was canceled by the new company, you should file Form 1099-C, Cancellation of Debt, if the canceled debt is at least $600.