I would say "none of the above." You made a loan and loans are not reported on 1099-MISC's and you didn't incur a deductible expense. (I assume that you really dotted your i's and crossed all your t's in setting up this loan such that it's not considered immediate compensation by the IRS.) When you forgive a portion of the loan you've created compensation to the employee, compensation that gets reported on a W-2.
