What is a 1099-C and Do You Have to File One?
Recently, a few buy-here-pay-here dealers have reached out to TIADA with questions related to 1099-C filings. With that in mind, here are a few common questions about 1099-C filings.
What is a 1099-C?
Form 1099-C "Cancellation of Debt" is something the IRS requires for each debtor for whom you canceled $600 or more of a debt owed to you if:
(1)You are an applicable financial entity; and
(2)An identifiable event has occurred.
Are you an applicable financial entity?
If you have a Related Finance Company, you are an applicable financial entity. However, if you are BHPH but do not have a Related Finance Company, you do not have to file a 1099-C.
What is an identifiable event?
The most common identifiable events for a related finance company are the following:
- A discharge in bankruptcy under title 11 of the U.S. Code;
- A cancellation when the statute of limitations for collecting the debt expires;
- A cancellation of a debt from strict foreclosure after a repossession; and
- A discharge of indebtedness because of a decision or a defined policy of the creditor to discontinue collection activity and cancel the debt. A creditor's defined policy can be in writing or an established business practice of the creditor. A creditor's established practice to stop collection activity and abandon a debt when a particular nonpayment period expires is a defined policy.
Please note that this is not an exhaustive list and only a list of the most common reasons for a Related Finance Company. For a comprehensive list, you should consult IRS Guidance.
When are 1099-Cs due?
Provide Form 1099-C to your customer in the year following the calendar year in which the identifiable event occurs by January 31. If you cancel a debt before an identifiable event occurs, you may choose to file Form 1099-C for the year of cancellation. No further reporting is required, even if a later identifiable event occurs with respect to an amount previously reported. Also, you are not required to file an additional or corrected Form 1099-C if you receive payment on a prior year's debt. You must file the 1099c with the IRS if on paper by February 28, 2023, or March 31, 2023, if filing electronically.
Will this be taxable income to the recipient?
The short answer is yes, but the IRS recognizes five different categories of exemption to reporting canceled debt as income, including bankruptcy and insolvency.
Where can you find further information?
If you have additional questions, please consult with TIADA, your accountant, or IRS Guidance.