Growing Without Rain

News and Views about Taxes

IRS Closes Online Sellers Income Tax Loophole

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From the VoIP & Gadgets Blog, this tidbit caught my eye:

Starting in 2011, all U.S. payment providers including PayPal will be required by the IRS to report sales information about certain merchants to the IRS. …

According to Paypal, this new tax rule applies to any merchants receiving over $20,000 in gross sales volume AND 200 payments or more. However, I read elsewhere that it can apply to anyone making 200 payments, regardless of the $20,000 minimum.

I looked up the final regulation, accessible here, and the rule clearly requires that both conditions are met:

A third party settlement organization is required to report any information under paragraph (a)(1) of this section with respect to third party network transactions of any participating payee only if—

(i) The amount that would otherwise be reported under paragraph (a)(1)(ii) of this section with respect to such transactions exceeds $20,000; and

(ii) The aggregate number of such transactions exceeds 200.

I also want to note another part of the blog post:

Suppose I’m a broker and I buy a $3000 TV at a wholesale cost of $1000 but then sell it for $2500 via Paypal (a $1500 profit). The 1099-K form is only going to show the $2500 income earned for this sale and not the “true” $1500 profit. The IRS sees this as a $2500 profit, when in reality it’s a $1500 profit minus the listing fees, shipping, etc.

If you are filing Schedule C – and you better be! – you simply report the $2500 in your gross receipts on line 1, include $1000 in your cost of goods sold (line 36 on page 2 of Schedule C, which eventually carries to line 4 on page 1), and the gross profit of $1500 on the sale shows up on line 5 of Schedule C. You deduct your shipping costs and listing fees elsewhere on Schedule C (make sure you have documentation that they were paid!) – these can be listed as Other Expenses on line 27.

In short, if you keep careful records and make sure you report everything appropriately, it’s really not that big a deal.

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Written by nctaxpro

December 29, 2010 at 11:52 am

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