We have given advances to few employees in prior years and could not recover because these employees are no longer working with the company. Now we would like to write off these advances. Will it be treated as forgiveness of debt upon write off and do we have to issue 1099 to employees. What are the tax implications and potential risks for not issuing 1099s.

Thanks

I suggest the best course of action is to issue 1099-Misc to these employees once you can establish the fact that these employees either refuse to repay these loans or cannot pay back these loans back to your corporation.

As far as the IRS is concerned, your corporation is allowed to write off these loans as bad debt only after you can establish conclusively that you have attempted to collect on these loans and can demonstrate that these employees were not able to reapy these loans.

Personally, I have to say that I have not encountered this situation with any of my clients so I can only suggest this course of action. I would also recommend that you maintain adequate documentation for your records to support the fact that you attempted to collect on these loans.

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