In 2017 Bonnie,a sole proprietor,loaned her employee,John,$10,000 to help him buy a car.In 2019,before he repaid the $10,000,Bonnie told John that she was "tearing up" the $10,000 note in recognition of his strong job performance.How should John treat the amount forgiven?

Question

Quizplus · Accepted Answer

When a debt is forgiven, it is generally considered taxable income to the borrower in the year of forgiveness. In this case, Bonnie forgave the $10,000 loan in 2019, so John should treat it as taxable income in that year. Option A is incorrect because the loan was not Bonnie's taxable income in the year it was made. Option C is incorrect because the loan was not a gift - it was a loan that was later forgiven. Option D is incorrect because, while the forgiveness may be considered a gift, it would not be excludible under the annual exclusion amount since it was greater than $15,000 (the 2019 exclusion amount).

In 2017 Bonnie,a Sole Proprietor,loaned Her Employee,John,$10,000 to Help Him