Debt forgiveness and tax implications

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

One of the grounds for the termination of contractual obligations between legal entities and individuals may be the forgiveness of the resulting debt. This opportunity is rarely used in business practice, since the nature of the transaction raises many questions related to the legality of actions and documentation. When faced with the solution of such business transactions, even specialists have difficulties with the calculation and payment of the necessary tax payments.

So what is debt forgiveness and how realistic is it to document such a situation in compliance with established legislation?

When the need arises for debt forgiveness

The operation to terminate debt obligations is the cancellation of the debtor's obligation to the creditor. Such actions are possible only if they are notviolate the rights of third parties.

Quite rarely, forgiveness of debt between legal entities is called a transaction at no cost. An example is such a business tool as discounts that a buyer receives for fulfilling certain conditions.

When considering the issue of debt forgiveness, it is necessary to separate such a term as "free transfer", as these are completely different concepts. In the case of a gratuitous transfer of funds or goods, the buyer greatly simplifies the calculations related to the taxation of profits and reduces losses from VAT.

Forgiveness of debt obligations at no cost

The gratuitous closure of a debt can be considered the situation when the creditor does not require money or property from the debtor, which he must give to pay off the debt. It is worth noting that, according to the laws of the Civil Code, commercial companies cannot enter into gift agreements in the amount of more than 500 rubles. In this regard, in order for the transaction to be valid, the gratuitous forgiveness of debt by a legal entity must not violate this limit, or the creditor must be an individual, for example, the founder. Also, such transactions are possible with non-profit organizations.

Debt that receives the status of gratuitously forgiven is fully included in non-operating income. Moreover, the cost of such an injection is estimated according to market indicators and is regulated by Article 40 of the Tax Code of the Russian Federation. If income was received in connection with the acquisition of fixed assets, then itshould not be less than the residual value, which is registered in the account of the seller. Also, the minimum price of the debt cannot be higher than the amount of costs that were incurred in connection with the manufacture of the goods.

In what case is debt closure not subject to income tax

Gratuitous debt forgiveness cannot be subject to income tax if the we alth or funds are received from the founder of a company with a 50% participation or from a company that has the same share percentage. You can use this benefit provided that the property has not been transferred to third parties during the year.

The tax authorities are ambivalent about this privilege, as they believe that debt forgiveness by the founder is a transfer of property rights, not commodity values. For those who are ready to defend their point of view in court, it is recommended to use the judicial practice that has developed in such cases.

Redeemable debt forgiveness

Consider a situation where a supplier is willing to forgive a debt in exchange for certain commitments on the part of the borrower. Such actions cannot be called gratuitous forgiveness. In accounting, accounts payable written off due to the expiration of the limitation period are reflected as part of non-operating income.

When generating income from forgiven debt, the taxable base increases, so it is very important to make a correct assessmentdebt, so that the amounts received do not cause complaints from the tax office. It would be most correct to contribute to the income side exactly the amount of the debt that the creditor forgave. As a result of such an operation, the buyer has the right to also include input VAT in his expenses.

When drawing up a debt forgiveness agreement, it is necessary to specify in this document all the conditions under which the seller forgives the debt to the buyer. Only in this case can the forgiven amount be included in income. All actions of an accountant are regulated by article 250 of the Tax Code of the Russian Federation, paragraph 18.

Whether to recover VAT upon debt forgiveness

Currently, the law establishes the right to deduct VAT on purchased goods even if it has not been paid. Considering the situation of debt forgiveness, you may be faced with the question of how to deal with VAT in this case.

On the one hand, in such a situation, all the conditions for accepting a deduction are met. An invoice was issued by the seller and the goods received were used in business activities subject to VAT. Therefore, many do not have questions with the deduction. In turn, the seller also carried out the necessary procedures for calculating VAT for payment to the budget from that part of the sale for which it was decided to forgive the debt. As a result, there was no underpayment to the state budget.

Nevertheless, the regulatory authorities think otherwise. The tax authorities, as before, believe that a buyer who has not paid for the goods is not en titled to a deduction. They refer to the legislation, which states that the VAT deductionpossible only if real costs are incurred. And since the contractual obligations have been annulled, there can be no expenses on them. Therefore, value added tax deduction is not possible.

Due to the fact that the situation is ambiguous, each company makes a decision based on its knowledge of the laws.

Can a bank forgive a loan debt

Forgiveness of contractual obligations associated with obtaining a loan always occurs at the initiative of the bank. If the creditor decided to unilaterally forgive the debtor, then a formal notification of such intention is sent to him. This document is quite enough for the debtor to consider himself released from the obligation to pay the loan, but on condition that he himself does not mind. If such a decision is made mutually, then the parties conclude a debt forgiveness agreement, which specifies the conditions for compensation or gratuitousness of such a decision. After the termination of obligations on the principal debt, the need to pay interest also disappears.

When the debtor is released from the loan obligation free of charge, such a procedure receives the status of a donation operation.

Who can count on forgiveness of loan obligations

Usually debt forgiveness is initiated by the bank itself, and not at the personal request of the debtor.

A credit institution may well forgive a debt for a small amount due to the fact that the costs spent on collecting the principal debtwill be higher than the loan amount. Usually, banks give small debts to collectors, but this method is not always considered beneficial for a credit institution. Many banks simply do not work with collection agencies, and debt collection departments are looking for larger debts.

Loan Expiration

Another reason why a bank can forgive a creditor's debt is the expiration of the statute of limitations. If three years have passed since the date of failure to make the next payment, then the claims of the credit institution are considered canceled. Together with the main debt, the need to pay interest and pen alties disappears. The guarantor is also released from the obligation to fulfill contractual obligations.

Special circumstances leading to debt relief

There are special circumstances in the Civil Code, as a result of which loan debts are closed. Such situations include the death of a client, the disappearance of a debtor, the absence of contractual obligations for the succession of a debt in the form of an inheritance.

Debt forgiveness agreements may contain various conditions for terminating duties. For example, the debtor undertakes to return the principal amount in exchange for releasing him from the accrual of interest and pen alties. Such a scheme is beneficial for the bank, as it receives the bulk of the money, which is of the greatest value compared to the accrued interest.

How to issue debt forgiveness, sample agreement

In order not to wait for bad debts to expire, there isan official document with the help of which an agreement on the termination of debt obligations is drawn up. Based on the signed papers, you can write off the forgiven debt as expenses, and thereby save on taxation. Alternatively, the debtor may agree to return part of the funds in exchange for writing off a certain amount of debt.

Whatever the terms of the agreement, such a document must be completed in accordance with the requirements of the tax authorities. In order to avoid unpleasant moments with regulatory authorities, an agreement on closing a debt must be necessarily compensatory. The document must contain basic information about the debt, the reason for non-repayment of the amount of money, the amount of interest and pen alties.

In the case of a partial refund, which is the most preferable from a tax point of view, the exact amounts of the new obligation and the timing of its repayment must be indicated.

If the parties nevertheless decided to forgive the debt free of charge, then the reason for such an agreement may have to be explained to the tax inspector. In this regard, it is recommended to properly execute debt forgiveness. The tax consequences that may result from non-compliance with the rules can significantly affect the finances of the lender.

Partial or full forgiveness of debt to an individual

Such a phenomenon as the forgiveness of a debt to an employee or other individual is quite common. The organization carries out this procedure on the basis of the Civil Code. If the company pays off debtto his employee, then he, in turn, has income that is subject to income tax. The legislation establishes a non-taxable benefit in relation to the giving of gifts and the provision of material assistance. Free debt forgiveness may well receive the status of a donation, so amounts not exceeding 4,000 rubles are not taxed on income.

Controversial obligation to calculate insurance premiums

In addition to personal income tax, insurance premiums are charged on the amount of a non-repayable loan, since indirect income was received by an employee under an employment contract. If the company does not want to accrue such contributions, motivating its decision by the fact that the employee's income is not related to the fulfillment of labor obligations, then this point of view will have to be defended in a special way, referring to similar arbitration practice.

There are several official letters that express an unambiguous position on the need to accrue insurance premiums when canceling the debt of an individual. In turn, jurisprudence suggests that the closure of a debt obligation cannot be considered an employment relationship if this is not verbatim in the contract. In this regard, it is easier for companies to formalize debt forgiveness in the form of a donation agreement. It is worth noting that such wording is of no fundamental importance for the debtor himself.