Tuesday, November 1, 2011


The reason behind the creation of the new 1099-K reporting requirements was clearly to raise revenue.  The IRS says – “Third-party information reporting has been shown to increase voluntary tax compliance, improve collections and assessments within IRS, and thereby reduce the tax gap”.

I do not think that reporting payments made by credit and debit cards will result in substantially increased gross proceeds, and therefore also increased net taxable income, reported by small businesses.

It is a general rule among small businesses that you report as income to Uncle Sam what you deposit into the business checking account.  Of course this rule is only valid if you also deposit all receipts - all cash, checks and credit/debit card payments – to the business checking account.  But, also of course, this does not always happen – though it is usually cash that does not make its way to the checking account.

Credit and debit card payments made by customers are deposited, directly or otherwise, into the business checking account.  So these payments are, I expect, already being included in gross proceeds.  

Where I see the benefit of the reporting requirements involves the “Third Party Network Payments” from PayPal and similar services.  This should help to identify those small businesses that are truly “off the grid” and operate within the underground economy – especially those that involve selling products or collectibles on eBay and similar sites or via websites – and force them into reporting their income.

Unfortunately the IRS “exempts the reporting of transactions settled by a third-party settlement organization of a payee in a third-party payment network if the aggregate payments to the payee do not exceed $20,000 or if the aggregate number of transactions does not exceed 200 within the calendar year”.  This threshold, correctly, does not apply to credit and debit card payments.

This leaves out the true hobbyists and those who are selling used personal items similar to a garage sale – where no real taxable business activity exists.  But it also exempts many of the smaller underground businesses whose transaction activities fall under the minimums.  I would think the threshold for total payments should be $5,000 and the number of transactions should be 50 or even less.

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