Lenders often have some flexibility with the timing, especially if you're proactive in discussing it with them. While they have reporting requirements, they sometimes can work with you on structuring the forgiveness. For example, some lenders might be willing to split a large debt cancellation across two tax years (December/January) if you explain your tax situation. It really depends on the lender and your relationship with them, but it's definitely worth having that conversation well before the planned cancellation.

That's a really helpful suggestion about timing it with medical expenses. I do have some procedures I've been putting off that would probably hit the threshold for medical deductions. Do you know if lenders are usually open to negotiating the timing of debt cancellation? I wasn't sure if I had any control over when they issue the 1099-C.

Good point! Also, some states follow federal insolvency rules and some have their own. I live in California and they have slightly different rules for cancelled debt than the IRS does.

Thanks for this advice! Do we need to do anything special for sales tax collection? The items were sold to buyers in different states.

Good news - you don't need to worry about sales tax collection. eBay now automatically collects and remits sales tax in all states that require it. That's one headache they've taken off sellers' plates in recent years. Just focus on your income tax obligations - reporting the income on Schedule C, deducting your costs and expenses, and paying tax on the net profit. If you continue selling regularly, you might need to make quarterly estimated tax payments, but for a one-time cleanout of old inventory, you'll likely be fine just reporting it on your annual return.

Would it be better to just ignore the 1099-K and not report it? My cousin did that last year and nothing happened.

Honestly I hadn't considered doing it manually since I'm pretty intimidated by all the tax forms. Is Form 1065 something a regular person can figure out without an accounting background? And how would I calculate all the specific numbers for the K-1s?

Form 1065 is definitely doable without an accounting background, especially for a small, straightforward LLC with just two members. The IRS provides detailed instructions, and there are plenty of free guides online. For the K-1s, you basically take each income and expense item and allocate them according to your ownership percentages. So if your LLC had $10,000 in profits, your wife's K-1 would show $5,100 (51%) and yours would show $4,900 (49%). Same with deductions and credits. The actual form walks you through each line item. The trickiest part is usually just gathering all your business income and expense information, which you'd need to do for any tax preparation method anyway.

We're just a regular LLC with no special tax elections. When we formed it, we didn't do anything special with the IRS, so I think we're taxed as a partnership by default? Now I'm worried we messed that up too...

You're good then! You're right that a multi-member LLC is taxed as a partnership by default if you didn't make any special elections. You'll need to file Form 1065 and prepare K-1s for both of you showing the 51/49 split. One more thing to consider - if this is your first year filing, make sure you've obtained an EIN (Employer Identification Number) from the IRS. You'll need this for your partnership return. If you haven't done this yet, you can get one instantly online through the IRS website.

Do you happen to know if health insurance premiums for yourself (the sole prop) count as eligible expenses for the remaining 40%? I've been getting conflicting information.

For sole proprietors with no employees, health insurance premiums for yourself do NOT count as an additional eligible expense for the 40% portion. This is because health insurance for the owner is already factored into your net profit calculation on Schedule C. The eligible expenses for the 40% portion are limited to business mortgage interest, rent or lease payments, and utilities that were in place before February 15, 2020. The rules are a bit different for businesses with employees, which is probably why you've been seeing conflicting information. Always best to check with your specific lender since they'll be the ones processing your forgiveness application.

I got PPP for my sole prop photography business while having a full-time W2 job. Your bank is wrong - there's nothing in the PPP rules that disqualifies you for having W2 income. Try applying through a smaller bank or credit union, or one of the fintech lenders like BlueVine or Kabbage. I applied through BlueVine after BofA gave me similar pushback and was approved in 3 days.

Thanks so much for this suggestion! Did you need to create a new account with H&R Block or could you somehow import your return from TurboTax? I'm worried about having to re-enter all my information from scratch.

You do need to create a new H&R Block account, and unfortunately there's no direct import from TurboTax. However, you don't have to re-enter everything from scratch either. What I did was download my tax return transcript from the IRS website (the "Get Transcript" tool), which had all my basic info already included. Then in H&R Block, I just had to enter the main details from my original return based on that transcript, plus the correct 1099-NEC information. It took maybe 30-45 minutes total, which was worth it to avoid paying TurboTax's premium fee. They make the amendment process pretty straightforward, especially for correcting income on a 1099-NEC.

That's actually not a great approach because the IRS will charge you interest and penalties if they catch the mistake first. When you file your own amendment, you can often avoid the penalties (though you'll still owe interest on any unpaid tax). Plus, having the IRS send you notices can increase your audit risk.