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The 2020 Instructions for Forms 1099-INT and 1099-OID says that "you are not required to file Form 1099-INT for interest on an obligation issued by an individual", but I don't understand what they mean by "an obligation issued".

For example, if Alice asks an individual named Bob for a business loan, and Bob lends Alice the money, and Alice pays Bob interest of $600 or more, then must Alice file Form 1099-INT?

Does it make a difference if Alice is a Sole Proprietorship vs other corporate structures?

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In this case, the obligation (debt instrument, like a bond or IOU) is issued by AliceCo and purchased by Bob, so the exception does not apply and AliceCo must file the 1099-INT.

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  • Thank you for answering. But what if Alice is a sole proprietor? – ma11hew28 Feb 5 at 2:44
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It is the payer of the interest that matters, and when the payer is a business, the 1099-INT is required. The reason for the rule is that businesses can usually deduct the interest they pay as an expense, thus reducing their taxes. To counter balance this it makes sense that if a business is deducting interest, then some party should be receiving that interest as income, and paying tax on it. This enables audits of either party to line up. Note this doesn't mean if you receive interest income from an individual that you don't have to declare it; you still do; but it's not tracked in the same manner.

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  • Thank you for answering. If Alice is a sole proprietor, then would she be considered an individual? I think individuals (not just businesses) can also usually deduct interest they pay on business loans, but probably businesses that are incorporated generally pay much larger amounts of business loan interest than individuals. According to the 2020 Instructions for Forms 1099-INT and 1099-OID, the threshold for reporting is $600 in some cases, and I think the example I gave in my question is one of those cases. – ma11hew28 Feb 5 at 2:40
  • @ma11hew28 - I'm still doing more research on this... You might be right about the $10 vs $600 so I removed that statement. Unfortunately the examples they provide for when to use each don't cover the seemingly obvious case of interest on a business loan, but from the wording of the summary I'd lean towards $600 being correct too. – TTT Feb 5 at 19:25
  • OK. Cool. Thank you. – ma11hew28 Feb 5 at 20:16
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"Obligation" is just a fancy word for "loan". AliceCo is obliged to pay back the loan it took from Bob Person.

AliceCo can, of course, issue a 1099 to Bob and send a copy to the IRS if it wants to.

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  • OK. Thank you. So then the answer to my question is no? – ma11hew28 Feb 1 at 18:12
  • @ma11hew28 my interpretation of the regulation is that AliceCo does not have to issue a 1099 to Bob. But I'm not a tax attorney... – RonJohn Feb 1 at 22:14
  • OK. Thank you. I think that's right. – ma11hew28 Feb 1 at 23:46
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    @BenVoigt then why did I just get a 1099-INT from Ally for interest paid to me? – RonJohn Feb 3 at 17:58
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    @RonJohn: Because you're reading the rule backwards. You loaned money (made a deposit) to Ally, the borrower/debtor is a company, 1099-INT is required. Same case in the question -- the borrower/debtor is a company, so a 1099-INT is required. If an individual borrows from a company (perhaps a bank) they do not have to file 1099-INT reporting interest paid (perhaps on a credit card). If a business borrows, they do have to file 1099-INT. – Ben Voigt Feb 3 at 20:48

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