December 2, 2015
If you have ever done business with a pawnbroker you know how the transaction works. You drop off property. The pawnbroker loans you a certain amount of money based on his determination of the property’s value. You agree to retrieve the property within a certain amount of time and pay the loan amount plus interest. If you don’t come back to retrieve your property within the given time, it belongs to the pawnbroker.
On occasion, a property owner may not have the money to repay the loan at the end of the designated period, but they do have enough to pay the interest. The pawnbroker will generously “refinance” your property on a new contract for another period of time and this can go on forever. You are happy and the pawnbroker is happy, because it is a win-win for him—he gets to hang on to the property and collects the interest, which up until recently he didn’t think he had to report.
As it turns out, the pawnbroker is required to report any cash received from one transaction or in two or more related transactions once a threshold has been met. The transaction in this case would relate to a loan or payment from the person who pawned the items. Payment on a loan triggers cash received and once the aggregate total reaches $10,000, the pawnbroker has 15 days to file a return.
In a recent determination by the IRS, a pawnbroker argued that successive loans made to the same person were not related but legally separate because each loan was closed out and a new loan was issued with a new loan number. The Chief Counsel argued back that the loans were related; the first loan was the reason for the second loan, etc. and that the related transactions were for the same property.
The term for this business practice is called “serial loans” or seriatim loans and while legal, the practice does have tax consequences. Any person who is paid over $10,000 in cash in the same year must report the payments on Form 8300. And if it is a series of loans related because each subsequent loan was used to repay the principal owed on the prior loan, the money must be reported as soon as the $10,000 threshold has been met.
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