Hello, I had a contract for an event in September 2022, though in 2021 we decided to cancel, and we had to pay per contract 50k cancellation fees, we said we can't pay that much, and they agreed to 10k so that is what we paid in 2021. I recorded the 10k in prepaid in 2021. No I am planning to recognize the expense in 2021 Sep. but do I need to record a liability and forgiveness for the 40k that were renegotiated and do I need to record them in 2021 or 2022?
Thank you
I would consult an attorney or CPA.
If this was a renegotiation of the contract, I would say no forgiveness of debt. But if there was a legal obligation and they just said that's "OK", then maybe forgiveness of debt.
Probably need more details from the contract and how it was decided to pay 10K instead of 50K.
it is not taxable. there is an exception for canceled debt, including interest, that would have been deductible if paid
IRC 108
(e)General rules for discharge of indebtedness (including discharges not in title 11 cases or insolvency)
For purposes of this title—
(2)Income not realized to extent of lost deductions
No income shall be realized from the discharge of indebtedness to the extent that payment of the liability would have given rise to a deduction.