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Reimbursements or Revenue? The 1099-K Challenge for Small Businesses | Tax Sherpa Stories

September 26, 20239 min read


The tax landscape is constantly evolving, and the latest shifts in the 1099-K reporting rules have left many solopreneurs and small businesses scrambling for clarity. This change, although appearing minor on the surface, could have profound implications for those in the freelance and small business arena.

Originally, the 1099-K was issued by platforms when two conditions were met: more than $20,000 in transactions and over 200 individual transactions. However, with recent changes, this threshold has drastically reduced to just $600, regardless of the number of transactions.

This might seem straightforward, but it complicates matters for those who frequently use platforms like Venmo for personal reimbursements. Suddenly, personal dinner splits, Girl Scout badge reimbursements, or shared vacation expenses could appear as business revenue. The line between personal reimbursements and actual business revenue becomes blurry, making tax reporting a potential minefield.

Our latest episode of Tax Sherpa Stories delves deeper into this topic, shedding light on the nuances of the 1099-K reporting rules and offering insights on how to navigate them. Whether you're a seasoned business owner or just starting out, understanding these changes is crucial to ensuring accurate tax reporting.

LinkedIn Article: https://www.linkedin.com/news/story/new-irs-rule-for-ticket-resellers-5785116/
IRS draft forms: https://www.irs.gov/draft-tax-forms


Transcript:

New 1099-K Rules Have People in a Panic Tax Sherpa Stories

[00:00:00] So we have a solo edition of Tax Sherpa Stories today, and that's just because when we record these, it's Serena and I have a meeting every morning and usually we'll record them then, but today got away from us. I'm picking up the slack here in the afternoon.

The thing about taxes is that they are a reflection of policy. A lot of people don't understand that. They think that the IRS makes the rules, and they do to some degree, but really the core of everything is set by Congress. A year and a half ago, almost two years ago, the the Congress said that the 1099k reporting rules needed to change.

And what that means is that if you have a platform of some sort, like PayPal is a platform, American Express is a platform Visa is a platform, StubHub is a platform, Airbnb is a platform, these are all platforms that process payments from one party to another. They are not receiving [00:01:00] any money on their behalf, but they are transmitting from party A to party B.

So under the old rules, a 1099 K was issued if two things were true. First thing was there were 20, 000 worth of transactions over the course of a year to the destination party, and there were over 200 transactions. So both those had to be true in order to, in order for that platform to create a 1099 K and they send a copy to the person.

Receiving that money. And they sent a copy to the IRS. So then the IRS has something, some third party validation say, okay. This taxpayer on the receiving end of this, got this money and we now know that. That should have been matching up with revenues reported on tax returns and such.

The rules were changed and this is part of the COVID legislation. The rules were changed. So instead of 20, 000 and 200 transactions, new rules were doesn't matter how many transactions and 600 worth of monetary value being transferred [00:02:00] to a party over the course of the year. It doesn't have to be from one person to another.

It could be 10 people. Paying 60 bucks each to the person receiving it. That adds up to 600. Platform has to generate a 1099k. So at the very end of 2022, it was like December 23rd or something, like one of the last business days of the year. The IRS says we were supposed to implement this rule, but we're not going to, we're going to kick it back a year just because basically they gave up.

It was too complicated. That year grace period is coming to an end and we're starting to see articles like this one new IRS rule for ticket resellers. This is a bit. Misleading here on the title here, because the new IRS rule applies to all platforms.

So the saying the IRS is substantially dropping the reporting threshold concert and sporting event ticket resellers. Again, it's not the IRS it's Congress, and this is not just for concert and sporting event ticket resellers. It's for everybody. Just 600 from 20, 000 last year. That means resellers will receive a 10 and nine K from platforms.

They use such as [00:03:00] ticket master and sub hub. If they hit the threshold this year that they won't owe additional taxes unless they make a profit. That's a critical thing. The change is taking place as superstar music acts and blockbuster sporting events, thanks Swift, Beyonce, NFL games, and soccer phenom Lionel Messi, among others, push secondary ticket prices to new heights.

Yeah, so if you're, if you are using one of these platforms and you buy a ticket and sell a ticket and the sale that you generate revenue from is more than 600 combined over all transactions over the course of a year, then you're going to get one of these 1099Ks. , it's hard to really put into.

Let me put into what was the goal here? Because were there so many people using StubHub and whatever, and , being tax cheats. That's really the question. I don't know. I guess we'll find out. But 20, 000, like if you're in a business, 20, 000 is a pretty low threshold, 200 transactions, it's pretty low threshold.

So if you are if you are below those [00:04:00] thresholds, then, chances are, this is like a side gig for you. And the IRS wants to know Congress wants to know. So that is that is something to be aware of. Now it is US law that you are required to report all income and there's no exceptions to that.

Not really anyways. So if you're selling tickets, if you're selling lawn cuts, like I pay my lawn guy on Venmo. I pay my daughter's music teacher on Venmo.

So all those people who were trying to skirt around those rules by using these, third party platforms are going to be caught up in this. Now for those people, , You're required to report your income. So that's just how it is. You have your revenue, you have your expenses, you have all kinds of tax strategies available to you, just do the right thing and file as you're supposed to.

The part that trips me up more than that is I was in college. And, this was before the days of Venmo and all that kind of stuff. PayPal, I think it just started we had it, frequently where [00:05:00] somebody, we'd go out to dinner, there'd be eight or 10 of us and one person would pay on their card, everybody would pay them back.

And I got myself in trouble a couple of times that way, because I would, people would give me cash and then I wouldn't pay off the card with the cash. I would just spend the cash. And I was like, why don't I have any money? But that's the sidebar. But if you go out to dinner, it could be, school friends could be work friends could just be, doing whatever and people then Venmo you to cover the, their share of the bill.

And that adds up to more than 600 over the course of a whole year, which. If you want to like more than a couple dinners, it's going to be over 600 then that is that is going to be a problem because all of these things that's not, you're not making any income, it's not a business activity.

You're just getting reimbursed for, money that you spent, in and for personal expenses. It's that group that I really worry about. And there's no way really to distinguish between those two. So if I pay my lawn guy on Venmo, that's business revenue for my lawn guy. If I [00:06:00] pay, my friend like my kids do Girl Scout stuff and we are sending stuff on Venmo to reimburse.

It's Oh, you got the vests. I owe you? 23 or whatever it is. Those are all non. Business activity things that aren't real revenue, they are reimbursements. So it's a very open question as to how 2023 taxes and forward are going to be filed when it comes to those kinds of things.

Will there be a special exception where you just declared this was not a business activity, this was just a reimbursement from, personal I don't know. I haven't seen any of the any of the form 1040 forms from the iris as of yet, in fact let's take a look at that real quick.

So here the iris actually publishes draft forms. And iris. gov slash draft dash tax dash forms. And they put these out of actually for public comment. And here is the current draft of schedule one for the 1040. This was the schedule one, two, three thing was [00:07:00] introduced as part of the tax part of the Trump tax reform to quote unquote simplify.

They just took all the things that were on. the 1040 and then just moved them over to schedules. Okay, sure. 1040 is theoretically shorter now. Maybe we would be putting it in activity not engaged. In for profit income, you know that could be but no matter how you cut it This is going to be a thing that a lot of people have not had to had to deal with yet before and a lot of people, you know may not have the sophistication to Understand like why am I getting this 1099 from Venmo or whatever?

So it's it's gonna be It's going to be an issue. If you're out there and you're going and you're getting, reimbursed, for whatever dinner Girl Scouts badges, whatever the case might be, then just be aware that these forms are coming. Unless the iris just punts again but some sometime, whether it's this year or next year or the year after this is going to become a thing [00:08:00] and we're all gonna have to deal with it.

So that's that's today's tax Sherpa story. The 10 99 k fiasco, that is brewing. And What we here at Tax Sherpa do is we help solopreneurs, small business people 10 and nine contractors. We help them structure their tax lives more efficiently and optimized so that, they can pay way less in taxes and sleep a lot better.

If you have, or if you have a pending 1099 K issue, give us a call, contact us go to taxsherpa.com and book a discovery call and we can talk over your issues and then we'll get you sorted.

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Neal McSpadden

Neal went from owing the IRS over $1,300,000 to Zero and in so doing discovered the world of tax planning. Since 2011 he's helped tens of thousands of clients save hundreds of millions of dollars on overpaid income taxes.

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