Remember the battle in Congress at Christmas over extending the payroll tax reduction? Get ready - tomorrow is Feb. 1, so let the battle begin - again!
The Marine Retailers Association of the Americas last week signed onto a letter by the “Broad Tax Extenders Group” (1,500 businesses, associations, community development groups, and non-profits) and delivered it to every member of Congress. It urged another extension of the payroll tax reduction that expired at the end of 2011. You’ll recall Congress extended it only until Feb. 29, 2012.
The letter called on Congress to act now to continue the extension, citing wide-ranging benefits to taxpayers, jobs and the broader economy. “Failure of Congress to act in a timely manner on this will cause more economic instability and put consumer confidence back in the toilet,” says Larry Innis, MRAA’s Washington lobbyist, “and that’s obviously the last thing we need in the boating industry right now.”
MRAA members, indeed the whole marine industry, should tell their congressional representatives that, while we support much-needed work on a comprehensive tax reform plan, a seamless extension of the expiring payroll tax provision cannot be held up waiting for some big reform package we’re never going to see this year! Come on, Congress hasn’t even been able to pass a required federal budget in more than three years!
Here comes your new 1099-K
If you haven’t already, you will be getting your 1099-K form, a new IRS information return that will come from your credit-card processors (debit & credit cards) and/or third-party payment networks (PayPal, Google Checkout, etc.) The 1099-K will document all 2011 transactions processed for you as a retailer if you had more than 200 such transactions and $20,000 in annual gross receipts. Of course, in keeping with the IRS tradition of paperwork, some 53 million 1099-Ks will likely be issued.
The 1099-K law was signed by President George W. Bush in 2008, but is just now taking effect. Electronic payments are a growing part of our economy. Up to now, they’ve never been officially reported to the IRS -- people were on their honor to report this income. Now, all businesses will get 1099-Ks, not just small businesses. While larger businesses have tax teams to handle such matters, unfortunately, most small business people like dealers presumably don’t. Enter probable hassle.
The IRS says it’s all pretty simple. In the top box of your 1099-K will be the total gross revenue processed by your provider. Beneath should be a monthly breakdown. The IRS will look at the gross sales amount reported on the 1099-K compared with the total gross receipts reported on your tax return. The amount on the tax return has to be at least as much as what’s reported on the 1099-K.
Hold the phone! These amounts reported to the IRS are gross sales numbers. But, generally, businesses never actually make their gross sales because of refunds, frauds, exchanges, and returns. None of those expenses will be taken out of the reported gross sales amount. Further, businesses don’t pay taxes on gross income but on net income. So, welcome to what I call the IRS “hassle factor” -- it will be incumbent on you to take the gross amount reported and capture all the related transaction fees, charges, returns, and other expenses in your total tax filing. Or, you’re going to pay more tax than you should.
In the end, this may not be the biggest headache if you have good digital record keeping and you’ve been determining all along the correct income and reporting it. But, if you don’t have a good digital record-keeping system, this could be a nightmare this time around, and an even bigger reason why you want to move to a good system now.