Loan Repayment on 1099-MISC--how to report so not taxed?

[ss-mendo-munny]

Several years ago we made a $10,000 loan investment to a local business. This year they paid back $5,000 of the loan and $600 interest. They sent a 1099-MISC for $5600. Only $600 should be taxable. How do I handle this for the 1040 tax form so that I don't pay tax on the $5000 Loan?

[ToddL99 · Accepted solution]

Ideally, you would be able to contact the payor and have them send a corrected 1099-MISC that does not include the amount of loan principal repaid. 

If you aren't able to get a corrected 1099-MISC, you will have to report the income and then enter an offsetting "expense"  for the amount of loan principal  you were paid.

To report the income: 

If the 1099-MISC reports investment income that is not related to your main job or self-employment, enter the information as follows in the 1099-MISC interview: 

• Enter the 1099-Misc in the Other Common Income  section (Enter "1099 misc" in the Search Box and Select "Jump to 1099 misc form") 

• For "Description", enter "Loan repayment with interest" 

• Also check that it does not  involve work like your main job, that it  did  not  involve an intent to make money, and is not a recurring payment (received in the past or expected in the future) (these questions only apply to active, not passive, income). 

• The income will be reported on line 8 of Form 1040 of your return (Other income from Schedule 1, Line 9). 

To enter the "expense": 

• Go to Less Common Income, Miscellaneous Income and Other reportable income. Enter "Lawsuit settlement" in the Search Box and Select "Jump to lawsuit settlement" "to get to this screen

• Continue to the screen "Other Taxable Income". Enter the description as "Repayment of principal" and the amount as a negative number. Entering "-$5000" here will offset the loan principal amount included on the Form 1099-MISC. These are NOT wages. 

A corresponding negative amount will be entered, and line 8 of Schedule 1,  will be zero. See the attached screenshot example of how your entries would look:

[ss-mendo-munny]

Thank you. Your instructions worked perfectly...and then BOOM I got a corrected 1099-MISC in the mail without  even asking for it!