What the New Form 1099-K Hath Wrought: Changes on Business Tax Forms

There’s a new information reporting form coming this year: Form 1099-K. This form will report how much in payments are received by anyone via credit card and other third party payment systems (e.g. PayPal). This seems like a good way for the IRS to make sure that all credit card payments are being reported. (This was mandated by a law Congress passed a few years ago.)

However, what the IRS has done is redesign Form 1120, Form 1120S, Form 1065, Schedule C, and Schedule E. All of these forms now have a line asking for the amount received via merchant cards. (These are draft forms, so the forms could change. However, based on what I’ve been told these lines will remain.)

For business entities, there will be problems. Most businesses, especially large businesses, aren’t keeping track of income by payment type. For the larger entities, they may have to back into sales by credit card based on the Form 1099-K.

In any case, the amounts on the Form 1099-K’s will not match true sales. First, these amounts will include sales tax, shipping, and other non-sales charges. Second, the amounts on the Form 1099-K’s will be reported using cash basis. Any business that is accrual basis will have matching issues. Third, the reporting will likely be meaningless for any business that reports on a fiscal (non-December year-end) year.

Of course, any business could have matching problems. Consider online-inc.com, a company that only sells by credit card. On December 30th, they sell $1,000 by credit card. The company is accrual basis, so they report the income. Their 1099-K will not include the income.

But the same issue likely would occur for a cash-basis entity, too. Most smaller businesses enter credit card sales when they happen. The credit card company will note the sale on the 1099-K when the money actually goes to the customer.

The solution that I expect most businesses to use is to just use the Form 1099-K to populate this line. It’s simple, and guarantees that there will be no matching problems. Of course, that puts the cart before the horse but if you’re a business owner or a tax professional this solution is likely the one that lessens the risk of an audit.

Personally, I think this is just going to lead to problems. Before last month’s OCEA meeting, we discussed this issue and realized that most of our business clients are unprepared for what’s about to happen. Indeed, most business entities ignore 1099-MISC’s as the forms aren’t needed to prepare their returns. The same won’t be the case for the new 1099-K, so tax professionals will need to educate their clients…and soon. Overall, this is just another reason why tax professionals likely have lifetime employment.

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