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Bruce99 · Feb 8, 2009, 09:26 AM

I would like to know what the accounting JE would be to record a portion of a business bank loan being forgiven? Meaning, if your Incorporated business owed the bank $200,000 but settled with the bank for $70,000, how would you record the forgiveness of the $130,000? Thanks.

codyman144 · Feb 8, 2009, 02:21 PM

Its an extraordinary gain.

Bruce99 · Feb 8, 2009, 09:25 PM

Okay, but how is it booked? Debit the loan but credit what? Are you saying that it would have to be shown as income and therefore would be taxable? Thanks.

codyman144 · Feb 8, 2009, 10:05 PM

Sorry for the brevity of my answer, this seemed like it could be homework to me so I gave a vary vague answer. Considering that this seems like a real question now let me see if I can find the absolute right answer for you.

Okay well I know for sure that from a GAAP prospective yes this is a type of gain. You bought something (asset) on a loan (liability) and out of the goodness of the banks heart for some reason they decided to reduce your liability. You gave nothing up for this and provided no services for this so it has to be a gain. It is an extraordinary gain because it is not normal in your business practice.

Okay taxable? I don't feel fully qualified here so don't take is as any legal advice but my gut say yes this is most likely taxable income. The bank is going to be able to claim a deduction for the forgiveness (write-off) and Uncle Sam doesn't like it when one party to a transaction can take a deduction without the other claiming income. Furthermore this seems backed up by this: Tax Law (Questions About Taxes): Loan forgiveness, form 1040 schedule c, loan disbursements

However, I recommend you call your tax professional or get one if you do not have one and get a professional opinion. Accounting these days is so complex that you cannot be an expert in all areas and I am not a tax expert.

Bruce99 · Feb 9, 2009, 08:10 PM

Just so you know, I am also an accountant... in Canada. And yes this is not the type of thing you come across very often. This situation relates to a friend of mine whose business is basically closed but there are tax matters to close up and I am trying to help. What you are saying is similar to what I was thinking but I can't seem to get a definitive answer. I'll keep looking. Thanks for your input.

Cheers.

codyman144 · Feb 10, 2009, 09:11 AM

Originally Posted by Bruce99

Just so you know, I am also an accountant......in Canada. And yes this is not the type of thing you come across very often. This situation relates to a friend of mine whose business is basically closed but there are tax matters to close up and I am trying to help. What you are saying is similar to what I was thinking but I can't seem to get a definitive answer. I'll keep looking. Thanks for your input.

Cheers.

Hey Bruce,

Sorry about that I always base my answers on the assumption that my audience is not very experienced in accounting. I didn’t mean to dumb down the answer too much.

Do you follow the same accounting rules and GAAP in Canada that we do here in the US? I would imagine you have a similar body to our FASB and your rules are similar but somewhat different. I would think the logic would be the same in the answer to this question.

Also, I really could not even begin to give you an answer on Canadian Taxes. I have no knowledge to how your tax system works, but again I think the logic would be the same. Sorry I could not be more help on this :(

Bruce99 · Feb 10, 2009, 06:39 PM

Not to worry, beggars can't be choosers about the answers they get. :-)

US and Cdn GAAP are similar but not 100%. Don't ask me what the differences are, it's one of those use it or lose it type of things and it has been a while since I've needed to compare. Once again thanks for your input.

Cheers.