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Accepting Credit Cards Will Pose Reporting Issues for Businesses
In 2008 President Bush signed into law a bill known as The Housing Assistance Tax Act of 2008. This bill put into place billions in tax incentives, including the more highly published first-time homebuyer credit. In the middle of this bill was a new requirement for banks and credit card merchants to report certain payments to the IRS. While the law passed in 2008 the new reporting requirements didn’t kick in until this year.
This new Form 1099-K reporting is aimed to close the tax gap. The difference between what is reported and what is actually earned. The federal government estimates that it loses about $300 billion each year from the tax gap. So, the new 1099-K is designed to track down unreported income.
Starting in 2011, financial firms that process credit or debit card payments and third-party payment processors must send their clients and the IRS an annual form reporting the year’s transactions. The Form 1099-K is very similar to the Form 1099-DIVand 1099-INT given to accountants every year. If you receive a Form 1099-K from your credit card merchant, drop that 1099-K in your tax file because your accountant will be asking for it.
The Form 1099-K will report the gross amount paid out without any adjustments for fees, returns, or mistakes. For instance, Form 1065, US Return of Partnership Income, has been revised. The draft form has new line items. Line 1a requests “Merchant card, third-party payments, including amounts reported on Forms 1099-K. There appears to be a way to adjust the gross amount for returns, allowances, and cash-backs on line 1d. However, this means that there will be issues reconciling the forms against income actually received.
Accurate recordkeeping and separating credit cards and third-party network payments has become a must. Many businesses which take credit card payments may need to revise their bookkeeping practices to make the reconciliation easier. Also, those taxpayers who sell items through eBay and use PayPal may receive the Form 1099-K and need to file Schedule C.
There is currently an exception for the de minimis payments with respect to third party network transactions. 1099-K is required only when a merchant has at least 200 payment transactions a year or the aggregate payments exceed $20,000. As mentioned above, the goal is to catch income that is going unreported to the IRS.
According to IRS Commissioner Doug Shulman, “Better information reporting helps the tax system work better by ensuring that everyone pays what they owe. The new law gives us an important new tool closing the tax gap and also provides business taxpayers better documentation to compute and report their income and expenses.”
If you suspect that you and your business will receive 1099-K(s) please contact us before the year end. We will be happy to start the reconciliation process with you and help you revise your bookkeeping before the tax filing season is in full bloom.