What should loan balance be for a loan offset?

Here is the scenario,

Single member plan.  Owner took a loan, then COVID hit and business fell off (non-existent).  The loan was suspended and ultimately the business failed.  To close the plan the owner needs to understand how to calculate the defaulted loan balance.  What is the process.  Should interest be added?   Just use the last principal balance?  

Thanks

The offset balance includes interest through the date of the offset. If the loan was suspended under the CARES Act, then repayments were probably supposed to have started in January 2021, which means it probably defaulted on the last day of the calendar quarter following January 2021, which would be June 30, 2021. You could issue a 2021 1099-R, which would include interest through June 30, 2021, but that would mean they would have to amend their 2021 tax return.

Or, you could self-correct the loan under EPCRS, which allows you to report it in the year that it was corrected. If you're correcting it by defaulting the loan and reporting it in 2023, then it will include interest through 2023.