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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

Starting a business? Sole proprietorship tax info

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If you are starting a business of your own, congratulations and best wishes! Here are some things you probably want to know, from a tax perspective.

If you simply open the doors and start selling your product or service, the IRS considers you a self-employed sole proprietor. This is also the case if you are an independent contractor who receives Form 1099-MISC with Nonemployee Compensation reported in box 7.

As a sole proprietor, you file Schedule C with your 1040. You report your business income and expenses on Schedule C. Several things to note here:

If you have a Web site, you normally deduct the costs associated with the Web site on line 8, Advertising.

If you pay independent contractors for services related to your business, you deduct those payments on line 11. If you have employees, you deduct their salaries and wages on line 26. Note that you cannot deduct any payments that you make to yourself – you cannot treat yourself as an employee of your own sole proprietorship.

You can choose to deduct either the actual costs of operating a vehicle that you own or lease on line 9, or take the standard mileage rate (55 cents per mile in 2009). Regardless of which method you choose, you must keep written records showing the business use percentage of a personal vehicle, and you can deduct only the portion of your costs based on the percentage of business use.

Depreciation (line 13) can be complicated. Generally, you depreciate any item of equipment that you expect to use in the business for longer than 1 year (based on the percentage of business use). You can elect to expense items under section 179 rather than depreciate, but be aware that if the business use percentage of those items drops below 50%, or if you dispose of the item before the end of the depreciation period, you will have to take the difference between the amount you expensed and the amount that you would have deducted had you depreciated the item, and declare it as income. Thus, use section 179 expensing carefully. I normally suggest that big-ticket items be depreciated rather than expensed; you don’t usually need that much of a deduction when establishing the business and it can really bite you hard if you wind up going out of business before you reach the end of the depreciation period.

On line 17, deduct any fees you pay to attorneys and CPAs, and the portion of your tax preparation fees that are related to the business portion of your return.

On lines 24a and 24b, you deduct travel expenses and expenses for meals and entertainment. You cannot normally deduct meal expenses unless (a) you are traveling and required to stop for substantial sleep or rest in order to perform your duties, or (b) the meal has a business-related purpose, which usually means that it takes place in a clear business setting and is for your business, or that you conducted substantial business during the meal.

If your net earnings from your business, after expenses, exceed $433, you must also file Schedule SE and pay self-employment tax, which is your share of the Social Security and Medicare tax that you normally have withheld on a W-2, plus the share of those taxes that is paid by your employer when you receive wages. SE tax amounts to 15.3% of your net earnings, multiplied by 92.35%. You deduct half of the SE tax on line 27 of your Form 1040.

These rules hold even if you create a Limited Liability Corporation (LLC), if you are the sole member of the LLC; the IRS disregards the LLC and treates you as a sole proprietor under those circumstances.

Written by nctaxpro

March 24, 2010 at 11:41 am

Posted in Small Business, Taxes