Prepaid Contract Fee Income

[PATAX]

Client received 2023 1099-misc box 3 other income for over $1,000 from Brokerage Firm consolidated 1099 forms. Listed as prepaid contract fee income on supplement. Just curious as to what this is? Looks taxable on other income line not subject to se tax. Thanks.

[IRonMaN]

I haven't come across that one, but if you want an answer you could ask your client.  Of course the client is going to say "I don't know".  Or you could waste your time calling the broker so they could research it for you.  Personally, I would just load it in as other income and move on.

[PATAX]

Thanks Iron Man. That's what I was planning on doing. The only thing I could think of is that they prepaid fees for a brokerage house and then it was refunded. This is the first time I ever saw this too that I could remember.

[TaxGuyBill]

---

@PATAX wrote:

The only thing I could think of is that they prepaid fees for a brokerage house and then it was refunded.

---

If that is the case, it is not taxable (unless they somehow deducted the fees in a prior year).

[PATAX]

I just found this in fine print: Transactions described as "Contract Fee" represent distribution of coupon interest from securities which are characterized as prepaid forward contracts where distribution of interest is treated  as ordinary income. This doesnt make sense to me - why not just pick it up as interest income?

[IRonMaN · Accepted solution]

As a side note, Jim finished three returns while you were trying to read the fine print.😜

[sjrcpa]

Sometimes the 1099-MISC is for substitute payments in lieu of dividends. That also makes me wonder.

[PATAX]

@sjrcpa I think you are right Sue. Another reason I questioned it is when  I  transfer this to Pennsylvania return, they do not have a separate category for miscellaneous income, and this ends up getting put under gross compensation first line. She'll get pa tax forgiveness because she's retired and she qualifies, so there won't be Pa tax. But then I have to file a local eit return, Even though she's retired, and she has to pay local earned income tax on this because of the way it is coded. If it was interest or dividends then it would not be on the local earned income tax return. Dan.

[qbteachmt]

Wow, this is new to me, too. Apparently, it's like a Futures Option contract with payment made, but yet to be determined cost-price. I found this:

https://www.forbes.com/sites/robertwood/2021/05/29/money-now-taxes-later-with-prepaid-forward-contra...

[sjrcpa]

@PATAX That doesn't seem fair. It doesn't sound like earned income to me.

[PATAX]

You are exactly right but since they did away with our local tax collectors and they made one County Wide tax collector things have changed to say the least. If I don't have her pay this $20 in local wage tax then she'll get a notice from them.

[sjrcpa]

The $20 is cheaper and less stressful.