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I’ve mentioned the new 1099 reporting requirements a couple of times already, but now that it’s tax season and the new IRS Form 1099-K is going to finally make its debut, it’s a good time to review the new 1099 rules.

First, some background on the new 1099 reporting rules… A few years ago the Housing Assistance Tax Act of 2008 was passed as part of the Housing and Economic Recovery Act of 2008. While the main purpose of this new tax law was to provide much needed housing reform, there were other purposes included in the bill, such as the need to improve voluntary tax compliance by small business owners, more specifically, online business owners.

The IRS realizes that there are millions of dollars in tax revenues that are lost due to unreported transactions (known as the tax gap). The majority of these unreported transactions are believed to be online transactions. The purpose of this bill is to try to reduce the tax gap by forcing credit card processors and third party settlement organizations to report certain transactions to the IRS.

In plain English, the IRS wants credit card and third party payment processors such as PayPal, eBay and Amazon, to report transactions made by their customers. This means that if you accept credit card payments for goods or services that you sell, or if you use PayPal or another third party to accept credit card payments for goods or services that you sell, you could get a 1099-K this year.

What is reportable? Basically, any transaction where a payment card (credit card or gift card) is accepted as payment for goods or services is reportable. In addition, any transactions that are settled through a third party payment network (such as PayPal or Google Checkout) are also reportable under the new rules. Transactions that are not reportable include ATM withdrawals, cash advances against the credit card, checks issues in connection with a payment card, or any transaction in which a payment card is accepted as payment by a merchant or other payee who is related to the issuer of the credit card.

Are there any exceptions? Yes, there are two exceptions to note. First, payments made outside the U.S. do not have to be reported as long as the payment processor has no reason to know that the payee is a U.S. person. Second, there is a de-minimis exception for third party payment processors. Third party processors such as PayPal have to report on payees only if they receive $20,000 in gross payments and over 200 payments during the calendar year. That means that if you use PayPal to process your transactions and you earn less than $20,000 or have less than 200 transactions, then you probably won’t receive a 1099-K.

How will it be reported? The IRS introduced Form 1099-K to report credit card and third party network payments. This form is required to be provided to the IRS by February 28, 2012. If you expect to receive a 1099-K, it must be provided to you by January 31, 2012. 1099-K forms received in 2012 will be to report transactions that took place in 2011.

How is the 1099-K different than Form 1099-MISC?  Form 1099-MISC is used to report income earned by an independent contractor who is not your employee.  Generally it is for services provided, but a 1099-MISC may also be issued for other income earned (fees, commissions, royalties, etc.).  Form 1099-MISC is required when you pay a non-employee $600 or more in a calendar year.  In contrast, Form 1099-K will be issued by credit card processors and third party payment networks and transactions may be either service or product related.  There could very well be some overlap between the two, so keeping excellent accounting records will be a must if you are a small business owner who meets the requirements of both forms.

As with any new tax law or form, there are a few concerns. First, the 1099-K will be used to report gross transactions. That means if you have fees, charge-backs, deductions for tips, etc., those won’t be accounted for. You’ll need to keep detailed accounting records so you can deduct those items on your tax return, otherwise you’ll pay more tax than you should. Another concern is that payment processors, especially third party networks like eBay and PayPal will increase their fees to account for the additional bookkeeping and paperwork required. This could put a serious dent in some small business owner’s net profit.

The bottom line is that if you accept credit card payments in your business, those transactions will now be reported to the IRS. Since you should have been reporting that income to the IRS to begin with, it shouldn’t cause you any issues. However, because the law and form are new there are bound to be some complications, so good accounting records are a must.

Finally, you may have heard that there has been some relief granted regarding the 1099-K for the 2011 tax year. Don’t get too excited; the law is still in effect and 1099-K forms will still be issued. However, the penalties and withholding requirements have been delayed for a year, giving payment processors more time to adapt to the new reporting requirements.

To learn more about the new 1099-K, please visit New 1099-K Reporting Requirements for Payment Settlement Entities – www.irs.gov.

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The IRS announced a couple of days ago that taxpayers will have until April 17 to file their 2011 tax returns.

Generally if April 15 falls on a weekend, you are given an extra day to file.  However, this year April 15 falls on a Sunday and April 16 is Emancipation Day (a holiday observed in the District of Columbia), thus the April 17 deadline.

Taxpayers who file an extension will have until October 15 to complete their tax returns.  However, please remember that the extension is an extension to file, not an extension to pay.  If you expect to owe taxes, it is recommended that you send in a payment with your extension form to avoid interest and penalties.

The IRS encourages people to file their returns electronically to ensure their returns are accurate and to get their refunds faster.  You can start filing your free and e-filed tax returns on January 17, 2012.

Finally, the IRS has been making improvements to the website to help make tax season easier for taxpayers.  You can visit the website at www.irs.gov.

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2012 should be an interesting year for taxes because 1) it’s an election year and 2) the tax rate is expected to go up in 2013 (when the Bush tax cuts expire).

With the economy still crawling along at a snails pace, and with presidential candidates slugging away to get your vote, I’d be suprised if we didn’t see some tax law changes to help keep taxes low, but as William Perez of About.com explains in his 2012 preview post below, don’t expect to see those changes until the last hour…

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[Update: The IRS recently announced the 2012 mileage rates.  The new rates as of January 1, 2012 are 55.5 cents per mile for business miles, 23 cents per mile for medical miles, and 14 cents per mile for charitable mileage.  This is virtually unchanged from the July 2011 rates; the only difference is that the medical mileage went down half a cent.]

In response to higher gas prices, the IRS announced that the standard mileage rate for the final six months of 2011 will be increased.

For the first half of 2011, the business rate had been 51 cents per mile.  Due to rising gas prices, the rate for the remainder of the year will be 55.5 cents per mile.

The standard mileage rate is normally adjusted just once a year, but when there are large increases in gas prices, the IRS has been known to do a mid-year increase to account for the fact that it costs more to operate your vehicle.  The last mid-year increase was in 2008.

People who use their personal vehicles for business use can use either the standard mileage rate or they can deduct the actual costs of operating their automobile.

The rate for medical miles has also been increased for the rest of 2011.  The medical rate is going up from 19 cents to 23.5 cents per mile; the charitable rate was not adjusted and will remain the same (14 cents per mile).

While it’s always important to keep track of your miles, it’s even more important to keep accurate and timely records since the mileage rate is increasing in the middle of the year.

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Back in 2008, I reported that eBay and PayPal would have to start sending 1099s out to sellers who use those sites.

In the original bill, it was proposed that credit card processors would be required to file Form 1099 (there will be a new 1099-K just for credit card merchants) for each seller that has at least $10,000 in gross sales and 200 transactions.  Since then the numbers have changed to at least $20,000 in gross sales and 200 transactions, so less people will be affected by this new rule.

This rule is not limited to just eBay and PayPal.  All credit card merchants – including Amazon, eBay, PayPal, etc. – must start complying with the new rule beginning in 2011.

Given the amount of revenue and the number of transactions, this new rule won’t affect very many people.  But if you do meet the income and transaction requirements, don’t panic.  As long as you are reporting your income on your tax return, there’s no reason to worry about the new 1099 rules

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It’s almost tax time and many people are looking forward to getting big tax refunds.  Whether you’re using your tax refund to pay off credit cards, to pay for home improvements, or saving for your summer vacation, you’re probably wondering how much you can expect to receive this year.

Unfortunately, you can’t file your tax return until you receive all of your tax documents – including W-2s, 1099s, etc. – and most of those won’t come until the end of January.  However, there are several tax return estimators to help you figure out how much you can expect to receive.  Here are a few of my favorite tax return estimator sites:

Free Tax Calculators from Turbo Tax

At Turbo Tax’s website, you can find several tax calculators including TaxCaster, which allows you to calculate your 2010 tax refund.  Simple enter a few questions about yourself (single or married, any dependents?), your income and your deductions to estimate how much your 2010 tax refund will be.

H&R Block Free Tax Calculators

Or, you can go to the leading tax preparer, H&R Block for a free 2010 tax return estimator.  They also have a self employment tax estimator, which is helpful if you have your own business.

1040.com

1040.com has a number of tax calculators.  In addition to estimating your 2010 tax refund, at 1040.com you can also determine if your withholding needs to be adjusted, calculate your self employment tax, calculate your capital gains and losses if you sell any investments, compare tax deferred account growth to tax free investment growth, calculate how much of your Social Security benefit will be taxed, and much more…

While tax return estimators are most popular during January when people are anticipating their tax refunds, it’s a good idea to estimate your tax refund (or taxes due) throughout the year to determine if you should do any tax planning to minimize your income tax liability.

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The IRS recently announced the standard mileage rate to be used for 2011.

The standard mileage rate is the rate that taxpayers use to calculate their deduction for business use of their automobile. Also allowed are deductions for using your personal vehicle for medical and charitable purposes.

The standard mileage rate for 2011 for business miles driven is 51 cents per mile. Each year an independent company studies the cost of operating a vehicle (for business use, both the fixed and variable costs of operating a vehicle are considered) to determine the standard mileage rate.  The 2011 rate is just slightly higher than the standard mileage rate for 2010.

For medical and charitable purposes only the variable cost is considered, thus the rate is generally lower than the business rate. For 2011, the mileage rate for medical mileage is 19 cents per mile; the rate for charitable miles is 14 cents per mile.

If you are an online business owner, you may think you don’t use your vehicle enough to make it worth while, especially if you work from home. However, there are many circumstances that you may need to use your personal vehicle for business, such as:

- trips to the post office (this can really add up if you ship inventory)
- trips to the office supply store
- trips to meet clients or business associates for lunch or other business related meetings
- trips to continuing education events (conferences and classes, either local or overnight)

The best way to keep track of your mileage is to keep a travel log (available at any office supply store) in your car and to write down the beginning and ending odometer reading. If you go to the same destinations over and over again, you could also keep a calendar with business related trips on it, and use Mapquest or Google maps to calculate the miles.

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We saw many tax changes in 2009.  While some will carry over into 2010, some will expire at the end of this year.  Once January 1 gets here it’s too late to reduce your 2009 tax bill, so take advantage of these tax breaks now.

RMDs Suspended for 2009

One of the biggest changes for 2009 was the suspension of the rules requiring individuals over age 70 ½ to make withdrawals from certain retirement accounts.  This suspension applies to 2009 only, so seniors will have to resume taking their required minimum distributions in 2010.

First Time Homebuyer Tax Credit

In an effort to stimulate the housing market, a “first-time” homebuyer was established back in July 2008, but new legislation in 2009 gave the credit new life.  The first credit was actually a loan (up to $7,500) that had to be paid back over 15 years; this credit applied to first-time homebuyers who purchased homes between April 9, 2008 and July 1, 2009.

In February 2009, the American Recovery and Reinvestment Act of 2009 extended the credit through November 30, 2009 and increased the amount to $8,000.  Even better, taxpayers who qualified for this credit did not have to pay it back, unlike the first credit.

The Worker, Homeownership, and Business Assistance Act of 2009, signed by President Obama signed on November 6, made even more changes to the credit including:

• Higher income limits apply, allowing more people to qualify for the credit.  Under the new legislation, the credit is reduced if your modified adjusted gross income (MAGI) is more than $125,000 ($225,000 if you are married filing a joint return).  The credit is phased out completely if your income is greater than $145,000 ($245,000 for married filing jointly).
• Homes purchased before May 1, 2010 qualify for the credit
• Homes purchased for more than $800,000 don’t qualify for the credit
• The definition of first-time homebuyer was expanded to allow people who have had their current home for more than 5 consecutive years to qualify for the credit.

Energy Credits

While the energy credits aren’t new in 2009, the American Recovery and Reinvestment Act of 2009 (ARRA) extended the credits to encourage the use of efficient energy sources.  The biggest change was to increase the lifetime tax credit for energy efficient home improvements to $1,500 (from $500).  The separate cap for windows ($200) was also removed, although the lifetime cap still applies.

Cash for Clunkers

To stimulate the auto industry, the Cash for Clunkers program provided cash vouchers for consumers who traded in older, less fuel efficient cars for new cars (with better fuel economy).  This program ended on August 24, 2009 when it ran out of funds.

Help With COBRA Premiums

People who lost or lose their jobs between September 1, 2008 and January 1, 2010 may get help paying their COBRA premiums.  A new government subsidy was established to help pay up to 65% of the COBRA premiums paid by eligible individuals for up to nine months.  This subsidy is phased out for people with higher incomes.

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The IRS announced the standard mileage rates for 2010 this week.  The standard mileage rate is the amount used to calculate the cost of using a personal vehicle for business, charitable or medical purposes.

Starting on January 1^st, the standard mileage rates will be:

Business: 50 cents per mile
Medical or moving: 16.5 cents per mile
Charitable: 14 cents per mile

The standard mileage rates are lower than the 2009 rates to reflect the decrease in the cost of gas.  The IRS studies the cost of operating vehicles to determine the appropriate rate to use for deducting car expenses each year.  If the cost of gas rises significantly during the year, such as it did in 2008, the IRS can do a mid-year increase in the standard mileage rates.

Taxpayers have the option of deducting either the actual cost of operating their vehicle or using the standard mileage rate.  However, the standard mileage rate can not be used for a vehicle if the taxpayer has deducted depreciation on the vehicle, or if they have taken the Section 179 deduction for that same vehicle.

The standard mileage deduction is beneficial for taxpayers because it reduces the amount of recordkeeping that needs to be done, but it can result in a lower tax deduction than the actual cost method for people who have purchased new vehicles.

Source: IRS Announces 2010 Standard Mileage Rate

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