Has your financial institution ever bought back stock from shareholders? Or implemented a treasury buyback program?
Both strategies come with information reporting requirements to avoid penalties with the Internal Revenue Service. Buyback rules apply to both S corporations and C corporations and to holding companies. (If your institution is a wholly owned subsidiary, the holding company is liable for the reporting requirement.)
Stock buybacks are reported to the IRS though Form 1099-B (Proceeds from Broker and Barter Exchange Transactions) or Form 1099-DIV (Dividends and Distributions), depending on the circumstance.
When to file Form 1099-B for stock buybacks
Form 1099-B may be required if the company is considered a broker.
Per the IRS, a broker is any person who “effects sales to be made by others.” The definition includes corporations that regularly stand ready to redeem their own stock or retire their own debt.
If a company purchases shares of stock from shareholders on an irregular basis and does not actively pursue or stand ready to make redemptions, it would not be required to file Form 1099-B.
However, if a company promotes a buy-back program of shareholders’ shares, it is considered a broker and would be required to file Form 1099-B. There is no dollar threshold for filing Form 1099-B.
In fact, separate transactions and different types of securities are required to be reported on separate 1099-B forms, or substitute statements must be used. Form 1099-B must be provided to recipients by February 15 of the year following the transaction year.
When to file a Form 1099-DIV for stock buybacks
A company could have a reporting obligation, even if it doesn’t meet the IRS definition of a broker. For example, Form 1099-DIV must be filed when a company pays a shareholder $600 or more during a calendar year to liquidate all or part of their stock.
The amount paid to acquire the shares should be reported on Form 1099-DIV. If the distribution was made in cash, the amount is reported in Box 9. For noncash liquidation distributions, report the fair market value of the distribution in Box 10.
Form 1099-DIV must be provided to recipients by January 31 of the year following the transaction.
Reporting requirements for buybacks vs. transfers
Buying back shares and facilitating the sale or transfer of shares from one shareholder to another are different. The distinction is important because facilitating a sale or transfer does not carry any reporting obligation.
However, a shareholder could be obligated to report the sale of shares on their tax return, even if the company doesn’t meet the information reporting requirements. For example, a shareholder would need to report gains from a sale.
1099 forms must be filed with the IRS by February 28 (or March 31, if filed electronically) of the year following the calendar year when the distributions were made.
How Wipfli can help
Wipfli can help you gain clarity and confidence in complicated tax situations. We take a proactive approach to develop strategies that meet your short- and long-term needs. Our professionals have in-depth and specialized experience in the financial institutions industry — and many of our consultants have worked in financial institutions. We’ve walked in your shoes, and we can make your journey easier, starting today. Contact us or keep reading: