Legal Question in Tax Law in Texas

Re: Can I 1099 Someone For Unpaid Debt?

The short answer is "no."

You have a misconception that we often see in doctors and other service providers who are not paid for some of the services they provide, despite rendering invoices to their customers, patients, etc. The distinction is between a cash method taxpayer and an accrual method taxpayer. You are a cash method taxpayer -- you recognize income only when you are actually paid, and so here you only have to pick up in income the portion of your fees you actually got. An accrual method taxpayer picks up income when it is earned, i.e. when the taxpayer becomes entitled to receive it. Then if it is not received, they need to go back and subtract off the portion that is not received (i.e. the bad debt portion). That puts the accrual method taxpayer exactly where you already are -- having to report only what was actually paid to you, not the larger amount you earned and to which you are theoretically entitled.

Re: Can I 1099 Someone For Unpaid Debt?

I agree 100% with the reply from Burton Haynes with respect to taking any sort of tax write-off for your un-compensated services.

However, it seems only fair that the company you did the work for should pay taxes on the value of the "free" services they received.

In order to file Form 1099-C, Cancellation of Debt, you'll want to have evidence to support following information:

(1) the amount of indebtedness discharged (a contract between you and the company and evidence that you did X amount of work valued at $Y would be good);

(2) the name, address, and taxpayer identification number (TIN) of the company; and

(3) the date on which you formally forgave the debt and evdience that you actually forgave the debt (you'd want to write a letter to the company stating that they owed you $Y but you're forgiving the debt).

The reason you'd want to have evidence for the information you're reporting is that there are penalties for making false statements on tax forms.

You probably don't want to deal with this company any more in the future, but if you did, or if they have useful contacts that could mean more business for you in the future, this might actually be your best course of action, especially if the amount involved is too small to be worth filing a lawsuit.

In the forgiveness letter you could say something like, "I value our business relationship, and therefore I would like to formally cancel your debt to me in the amount of $Y for services performed ..." etc.