Friday, November 23, 2012


MISSOURI TAXGUY Bruce McFarland’s recent “McTax Hangout” online “tv show” discussed the issue of Form 1099-K.

Bruce reported that the IRS just sent out 20,000 letters to small business taxpayers regarding the issue of 1099-K income.

IRS Form 1099-K reports “gross” receipts that were “run through” a credit card.  This would include sales tax and, for restaurants, tips for waitpersons – and could also include “cash back” requested by customers using debit cards. 

So it is obvious that the “gross” receipts reported on a Form 1099-K by a third-party credit card provider is NOT the same as gross receipts from sales or services received by the taxpayer.

The problem is that, while I do not think that the 1099-K numbers are to be entered separately on the IRS tax forms (1040 Schedule C and E and 1120, 1120-S and 1065), the IRS will use the numbers reported on 1099-Ks for audit purposes, and possibly also for CP-2000 purposes.

What to do?

One solution, which is technically not correct, is to include the gross amounts reported on Form 1099Ks in the line for “gross” receipts, and deduct out customer “cash backs” perhaps in the line for “returns and allowances” or along with sales tax remitted and employee tips in the Cost of Goods Sold section on the line for “other costs”, with a statement attached to the return identifying the specifics of these “other costs”.  

Of course with the Form 1099K rules it is more important than ever for the small business owner to keep super-detailed records of all receipts and disbursements.


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