Used Car Dealer Magazine

FEB 2018

Used Car Dealer Magazine, the official monthly trade magazine of NIADA, offers readers the most current news and info on such topics as industry trends,technology,financing,marketing and dealership operations designed to increase profitability.

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8 BHPH DEALER → FEBRUARY 2018 TRIGGERING EVENTS FOR YOUR RFC G oing into a new year, one of the more onerous accounting tasks is generating 1099s for various vendors and payouts in excess of $600 during the previous year. Generating a 1099 to AutoZone for parts purchased doesn't faze anyone. But until recently, most of us weren't aware you also have to generate one for forgiven debt. Once a debt is determined to be "uncollectable" – not by you, unfortunately, but by IRS rule – it is considered to be income for the borrower. Since you get to deduct the loss as an expense, to balance the books someone has to consider it income and that someone is the borrower. Most charge-off situations don't create a problem when the loss involved is clearly a loss to you. If they stop paying, you issue a 1099-C. This is particularly easy in states that do not allow wage garnishment or when the finance company has elected not to pursue bad debt recovery. The following section outlines the "triggering events" that require a related finance company to issue a 1099-C. If you don't have an RFC, you need to contact your tax advisor regarding your obligations. EMPLOYEE VEHICLES OR OTHER INDEBTEDNESS Most of us have been there at some point. We've financed a purchase for an employee and – usually following termination of employment – he stops paying for the car. If an entity discharges a debt of the entity's employee, any income from the debt cancellation that is compensation, if it totals more than $600, must be reported on the employee's Form W-2, Wage and Tax Statement (Regs. Sec. 1.6041-2(a)(1)). Withholding and payroll taxes are issues as well when an employer cancels an employee's debt. If the person whose debt is discharged is not an employee of the applicable entity but the debt discharge is nonetheless compensation for services, the compensation should be reported on a Form 1099-MISC – it's "miscellaneous income" because under those circumstances it is compensation, not cancellation of debt income. Cancellation of debt income should not be reported on Form 1099-MISC. 1099-C TRIGGERING EVENTS • A discharge of indebtedness under Title 11 of the U.S. Bankruptcy Code for business or investment debt. This event does not apply to personal (non-investment) loans discharged in bankruptcy. • A cancellation or extinguishment making the debt unenforceable in a receivership, foreclosure or similar federal or state court proceeding. • A cancellation or extinguishment when the statute of limitations for collecting the debt expires, or when the statutory period for filing a claim or beginning a deficiency judgment proceeding expires. The expiration of the statute of limitations is an identifiable event only when a debtor's affirmative statute of limitations defense is upheld in a final judgment or decision of a court and the appeal period has expired. That requires court action and is not automatic. The borrower must have raised an affirmative defense. The mere passing of time does not trigger it. • A cancellation or extinguishment when the creditor elects foreclosure remedies that by law end or bar the creditor's right to collect the debt. This event applies to a mortgage lender or holder that is barred by local law from pursuing debt collection after a "power of sale" in the mortgage or deed of trust is exercised. • A cancellation or extinguishment due to a probate or similar proceeding. • A discharge of indebtedness under an agreement between the creditor and the debtor to cancel the debt at less than full consideration. • 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 practice to stop collection activity and abandon a debt when a particular nonpayment period expires is a defined policy. This has two parts and both must be satisfied to apply. The company must have a policy to discontinue collection activity and abandon the debt. Many companies discontinue active collection but do not abandon the debt, hoping the borrower might pay at a later date. • The expiration of the nonpayment testing period, commonly referred to as the 36-month rule. This is the final test and the one the IRS is latching on to. Regardless of the other tests, a 1099-C must be issued on any written-off debt that has not had any payment activity in the previous 36 months. That final test effectively puts a 36-month window on the reporting requirement. Regardless of circumstances, the expiration of the non-payment testing period requires the RFC to send a 1099-C. PAYMENT AFTER FORGIVENESS Once you've sent a 1099-C, you are past the point of no return. The debt is forgiven and you've reported that fact to the IRS. If a customer approaches you to settle after the 1099-C has been sent, you and the customer are out of luck. The debt is forgiven and you cannot accept payment. The IRS has been taking the position that when you write off an account as a bad debt it is forgiveness of income, so the amount of the deficiency you write off should be income to the recipient. You are supposed to issue a 1099-C and the borrower is supposed to report that amount as income. The IRS is acting as if you should send a 1099-C immediately, regardless of the eight tests mentioned here. That isn't what the law says, but since when have IRS auditors worried about that? REGULATORY 1099 RULES EXPLAINED BY DAVID BROTHERTON DAVID BROTHERTON IS A MODERATOR/CONSULTANT FOR NIADA DEALER 20 GROUPS. HE CAN BE REACHED AT DAVID@NIADA.COM OR (941) 371-7999. IF A CUSTOMER APPROACHES YOU TO SETTLE AFTER THE 1099- C HAS BEEN SENT, YOU AND THE CUSTOMER ARE OUT OF LUCK. THE DEBT IS FORGIVEN AND YOU CANNOT ACCEPT PAYMENT.

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