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?
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:
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