The new credit card reporting requirements have been in the news lately. But in case you missed it, here’s a short review. The Housing Assistance Tax Act of 2008 requires the companies that process credit card to issue a 1099K to the businesses they pay. For example, I take credit and debit cards from clients to pay for tax returns. I scan their card and the company approves the payment which appears in my business bank account a few days later. At the beginning of the year, I may receive a 1099K from the processing company. My annual charges are less than the $20,000 /200 transactions requirement so I may not receive a 1099K. CHANGE - This minimum only applies to third party payers like PayPal. Merchant card processers will issue 1099Ks for any charges or debits. Thanks to John for the catch.
These procedures were developed to help cut the Tax Gap. (Taxes not paid on business income that isn’t reported are a major contributor to the Tax Gap.) The major target was people who have income from eBay and other online stores which is seldom reported. If a bricks and mortar business is not reporting all their income, I would suggest it’s their cash receipts that are not reported not payments that go through their bank account.
If I do receive the 1099K, I will have to report that info on the new line 1a on my Schedule C. (The Schedules C, F, and E have been revised to include 1099K reporting.) However, I will have to subtract the 1099K amount from my gross receipts first so that I don’t double report income. If I don’t get a 1099K, I’ll just report that income with my cash and check income as always. And while the IRS added lines for the credit/debit income, they haven’t added lines for the deductions from the credit/debit income. Huh!
I want Line 1a on my Schedule C to match what was reported to the IRS on the 1099K but that income might not all belong to me. If I ran a restaurant, part of that payment may have included a server tip and it definitely included sales tax. That is not taxable to me. I could actually have credit card sales for food and drinks of $37,000 but receive a 1099K for $45,000. I need to take as an expense deduction on my Schedule C the sales tax and tips that I passed through to others. This may also mean a bookkeeping change on my part to track these deductions. For 2011, some businesses will have to recreate these deductions from their current records. Besides tips and sales taxes, business might also allow cash back or a charity contribution to be added to a credit/debit charge. These will also need to be deducted.
Farmers may not have to worry about tips but they actually have to break out their 1099K income on 2 different lines. One line is for resold animals and the other is for the raised items. And they might have to change the way they track settlement charges and sales tax too.
From what I understand, the IRS will be giving us some guidelines. However, we business owners need to understand that the 1099K may give rise to special deductions to keep from paying too much in taxes.