Collecting Income from Online Payment Apps? $600 is the New Reporting Threshold

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If you use P2P (Peer-to-Peer) payment apps, such as Venmo, Square Cash or PayPal, you may be surprised early next year when you find an IRS 1099-K form in your mailbox.

Under the American Rescue Plan, a new law requires P2P providers to send you and the IRS a 1099-K if the gross amount of your business income is more than $600.

Previous guidelines required P2P providers to only send 1099-Ks when you had 200 transactions and $20,000 or more in income.

This new law decreases the income threshold by more than $19,000 and lowers the transaction threshold from 200 to one transaction! So whether you’re accepting payments for personal or business income, many more taxpayers will be receiving the 1099-K in early 2023.

How it works

If you sell items online for extra cash and earn more than $600, you’ll be getting a 1099-K. If you occasionally rent a property that you own and charge more than $600, a 1099-K will be sent to you. Or if a client asks to remit payment through PayPal, $600 or more will trigger a 1099-K.

Each year, hundreds of billions of dollars flow through third party apps like Venmo, CashApp and SnapCash. This new, tougher tax law is designed to make it harder for individuals to fail to report income on lower-cost transactions.

Suggestions for good record-keeping

Here are some ideas to keep a close eye on the tax implications of your P2P transactions:

  • Confirm the numbers. Mistakes happen, so check 1099-Ks against your payment receipt records.
  • Report the information correctly on your tax return. Include the numbers from each 1099-K you receive and ensure you report all income from all types of payments received.
  • Maintain detailed records. This can help demonstrate support for your income and deductions.

Also keep in mind the 1099-K does not account for fees, chargebacks or other costs and refunded amounts. The gross amount is unadjusted and, according to the IRS, is not to be adjusted.

What if the amount on your 1099-K is wrong?

Contact your P2P provider to request a corrected form. The name of the P2P and a phone number will be located in the upper left corner on the form.

If you are unable to get a corrected 1099-K, the IRS will allow an explanation to be attached to your tax return, along with the corrected amount of your income on the return.

Remember, if you use Venmo and several other P2P providers to accept payments, you could receive 1099-Ks from all of them, depending on which ones meet the $600 threshold.

Reach out to the experts

For more information on protecting your side hustle or small business from unexpected tax liabilities, give us a call at (973) 301-2300 to see if a tax planning session may be right for you.

Leveraging Third-party Consultants to Give Your Organization a Competitive Edge

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Lack of specialized knowledge, technology and resources can make it challenging for organizations to complete all essential tasks in-house.

So it’s no surprise that roughly 300,000 U.S. jobs are outsourced each year.

Depending on your needs, third-party consultants can lend their expertise to a specific project like a software implementation, oversee ongoing needs such as executing on a marketing strategy, or assisting with improvements like optimizing departmental workflows.

According to Indeed, the most commonly outsourced jobs include customer support, IT and HR.

Here are the top reasons that companies outsource:

  • Free up internal resources. In today’s business climate, time is a hot commodity. Successful companies would rather spend their resources on revenue-generating endeavors. By outsourcing routine or more specialized services, you can take back more hours in the day to propel the business forward.
  • Gain an impartial view. Tenured employees are valuable to any organization. But eventually, you may be looking for an outside perspective, fresh ideas and deeper insights. Third-party consultants can offer these benefits without adding to your headcount.
  • Access the latest technology. If your company isn’t on the cutting edge of technology, a third party can offer the best, up-to-the-minute technological advancements to improve your workflow, output and customer experience. For example, prior to the pandemic our firm invested in virtual meeting capabilities to allow us to serve more clients in diverse geographic areas — a system that allowed us to remain fully operational and keep clients and staff safe during the pandemic.
  • Save money. When outsourcing, you’re paying trained professionals solely for the services you need. You don’t have to worry about providing benefits and insurance or incurring onboarding and training costs. Instead, third parties often charge an hourly rate or establish a retainer for the assigned job duties.
  • Improve service. Outsourcing can help improve your service — from speed to efficiency to quality. If a task or function is not within your team’s wheelhouse of expertise, passing it along to a specialized third party can enhance overall results.

 What’s the catch? There’s always a risk

Managing third-party risk is an ongoing process. Consultants often have access to sensitive company financials or client data, so preventive measures are critical:

  • Carefully vetting consultants
  • Limiting shared data
  • Implementing network segmentation
  • Routinely monitoring accounts

By understanding the risks and creating a strong line of defense, your organization can maintain peace of mind while reaping the benefits of outsourcing.

Find out how Magone & Company can play a vital role on your team

Are you looking to fill a specific financial role? From bookkeeping to small business accounting to CFO services, Magone & Co can help organizations like yours operate more efficiently — without investing in expensive staff and technology infrastructure. Get in touch to see how we can help.

Getting Ahead of 2023 IRS Cryptocurrency Reporting Requirements

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Know those 1099-B forms that show up at tax time from your broker? Well, if you’re dabbling in cryptocurrency, you’ll soon be seeing more of them.

Starting in 2023, U.S. legislation now extends the same transaction reporting rules to cryptocurrency exchanges, custodians or platforms (e.g., Coinbase, Gemini or Binance), as well as digital assets, such as cryptocurrency (e.g., Bitcoin, Ether or Dogecoin). The same legislation also puts into effect cash reporting rules for payments of $10,000 or more to cryptocurrency. That means businesses accepting payments of $10,000+ in cryptocurrency will have to report those earnings to the IRS (using Form 8300).

How is this different than in the past?
The legislation, enacted in 2021, expanded the definition of “brokers” who must furnish Forms 1099-B to include businesses that are responsible for regularly providing any service accomplishing transfers of digital assets (also known as virtual currencies) on behalf of another person (for example, cryptocurrency exchanges). Thus, any platform on which you can buy and sell cryptocurrency will have to report digital asset transactions to you and the IRS at the end of each year.

The cryptocurrency exchanges/platforms will have to gather information from customers, so that they can properly issue Forms 1099-B. But it’s not yet known whether an exchange/platform will have to file Form 1099-B itself (modified to include digital assets) or some other new IRS form.

Digital assets defined
For these reporting requirements, a “digital asset” is any digital representation of value recorded on a cryptographically-secured distributed ledger or any similar technology. The definition could also potentially include some non-fungible tokens (NFTs) that use blockchain technology for one-of-a-kind assets like digital artwork.

Separate from the broker reporting rules, a business that receives $10,000 or more in cash must report the transaction to the IRS on Form 8300. For this cash reporting requirement, businesses will treat digital assets like cash.

What to expect moving forward
If you use a cryptocurrency exchange or platform, and it has not already collected a Form W-9 from you (seeking your taxpayer identification number), expect it to do so.

Cryptocurrency exchanges and platforms, in addition to collecting information from their customers, will begin tracking the holding period, and the buy and sell prices of the digital assets in your accounts. Be aware that transactions subject to the new reporting rules will include not only the selling of cryptocurrencies for fiat currencies (government-issued currency, such as the U.S. dollar), but also exchanges of cryptocurrencies for other cryptocurrencies. 

It’s also good to keep in mind that the cryptocurrency exchanges or platforms may not have all the information they need to meet their reporting requirements under the new rules. So be patient, because it may be a challenging first year to get the information you need.

 

 

Could a State Tax Nexus Study Put Millions Back in Your Company’s Pocket?

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The broad variations in state tax requirements — what’s taxable and what’s not, the threshold for collecting sales tax or paying income tax, how and where to register and file — make it difficult for companies doing business across multiple states to remain compliant with economic nexus rules.

You may be underpaying (in which case get ready for penalties) or worse, overpaying. It’s a costly problem either way — and although not a new issue, changing laws have put a different spin on nexus.

Before 2018, for example, a company was only required to collect a state’s sales and use tax if it had a physical presence in that state. The result? Millions in revenue lost by states as ecommerce started to gain traction.

A Supreme Court decision (South Dakota v. Wayfair, Inc.) reversed the physical presence requirement, required every business with $100,000 in sales or 200 transactions in the state to collect and remit South Dakota sales tax. Other states quickly followed the South Dakota precedent, causing businesses to have nexus in many more locations than before.

Companies doing business in multiple U.S. jurisdictions also need to be aware of a second type of economic nexus beyond sales tax. If your company’s gross sales in particular states exceed a certain threshold, those sales would be subject to the state’s income tax.

The value of a state tax nexus study
As the laws changed, Magone & Company quickly went to work conducting state tax nexus studies to protect our clients. Word spread, and we began to receive inquiries from companies worldwide for the same service. Here are two examples of the results:

Health & beauty products wholesaler
A European company established a wholly-owned subsidiary in New York state with offices in New York City. The parent company approached our firm to find ways to mitigate the subsidiary’s tax burden, despite being told by its tax advisor that the U.S. tax filings were correct and appropriate.

After a comprehensive review of existing state and city laws and the subsidiary’s tax and financial records, Magone & Company amended the company’s tax filings to secure a refund of nearly $1.4 million in income taxes paid. We continue to serve as the company’s tax advisor.

Vitamin products wholesaler
The NJ-based subsidiary of an Asian manufacturer requested our help filing U.S. tax returns for a prior year as well as the current year.When we obtained the tax and financial records of the company, our review uncovered numerous discrepancies in previous tax filings related to carryover computations. In addition to amending previously filed returns, we also recommended changing the reporting of sales for the current year.

The total tax savings resulting from the work performed by Magone & Company was approximately $1.3 million, and the company has now retained Magone & Company as its auditor and tax advisor.

Who can benefit from a tax nexus study?
U.S. companies that conduct business in multiple states, as well as U.S. subsidiaries of foreign entities, generally have the most to save by conducting a tax nexus study. For more information, please reach out to the Magone & Company team.

The Tax Considerations of Working Remotely: What You Don’t Know May Cost You

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Millions of employees went remote when the pandemic first hit in 2020. Many never returned to the office — and more and more workers continue to make the transition. According to a Future Workforce Report, the number of remote workers is expected to nearly double from pre-pandemic level in the next five years.

If you’re currently telecommuting, it’s important to get up to speed with the latest tax developments that can impact your 2021 tax return, especially if you’ve been working in a different state from your usual workplace. Consider the following questions:

  1. Did you change your state of residency? If you relocated to a new state while maintaining your remote employment, be sure to update HR with your new address ASAP, as this can change your tax withholdings. An employer can be penalized for not withholding when they should have. And depending on where you live, some states offer withholding credits if taxes are paid or withheld in other states.
  2. Where are you paying income tax? If you’re working from a different state than where your company is licensed, your state taxes may or may not be affected. Each state has its own set of rules. For example, states like New York and Connecticut tax remote workers based on the location of their employer’s office, regardless of where the work is completed. On the other hand, if your office is in New York, but you move to California while telecommuting, you risk both states taxing your income.
  3. Are you eligible for home office deductions? For tax years 2018 to 2025, the Tax Cuts and Jobs Act (TCJA) excluded W-2 employees from the home office deduction. The deduction is reserved for self-employed remote workers who use their home regularly and exclusively for business during the tax year. Your home office could be a single room, a portion of a room or a separate building on your property that’s solely used to conduct business. If you qualify, there are two methods for calculating the deduction. Under the actual method, calculate the potential deductible amount by prorating your expenses with your business use. If you prefer not to keep track of your home office expenses, you can deduct $5 for each square foot of office space, up to a maximum of 300 square feet.

It’s a hot topic — and we can help you navigate it

Remote work offers many benefits, but also the responsibility to evaluate your new tax situation. As always, be sure to consult a trusted advisor for specifics on your individual circumstances before you file your 2021 return. Don’t hesitate to reach out to the professionals at Magone & Company for tax assistance. Give us a call today at (973) 301-2300.

 

6 Tips to Maintain Your Nonprofit’s Tax-exempt Status

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Once you’ve completed the process of securing your nonprofit’s tax-exempt status, the last thing you want to do is lose it. If you lead a 501(c)(3) organization, be sure to familiarize yourself with the IRS’s tax-exempt rules and prohibited activities to keep your status in good standing.

1. Political campaigning. 501(c)(3) nonprofits are banned from participating in any political campaign for or against a candidate running for public office. This applies to campaigns on all levels, including federal, state and local elections.  Your organization will be in violation of the rule if it makes contributions to political campaign funds or issues public statements favoring or opposing a candidate. However, your nonprofit is allowed to engage in certain activities promoting voter registration and participation. It can also provide voter information, as long as it remains neutral.

2. Lobbying. Lobbying is defined as attempting to persuade members of a legislative body to propose, support, oppose, amend or repeal legislation. Essentially, your organization can’t try to convince a legislator to vote a certain way. As long as lobbying doesn’t represent a “substantial part” of your nonprofit’s overall activities, it generally won’t harm your tax-exempt status. But what you consider insubstantial may differ from the IRS’s definition. Consult your tax advisor for further details.

3. Unrelated business income. Nonprofits are not designed to make money, but that doesn’t mean your organization can’t earn income, as long as it furthers your tax-exempt mission and meets several other legal tests. A nonprofit’s unrelated business income is taxed at the same tax rate as corporate income. This tax is commonly known as the unrelated business income tax (UBIT) and is triggered when an organization’s annual income exceeds $1,000.

4. Annual reporting. You can’t simply apply for and receive a tax-exempt status, then forget about it. Your organization must also satisfy regular reporting obligations (with certain exceptions for most faith-based organizations), including filing these federal forms:

    • Form 990, Return of Organization Exempt from Income Tax
    • Form 990-EZ, Short Form Return of Organization Exempt from Income Tax
    • Form 990-N, Electronic Notice (ePostcard) for Tax-Exempt Organizations Not Required to File Form 990 or 990-E

Your state may also have reporting requirements, so check with your attorney or advisor for details.

5. Private benefit inurement. No part of a 501(c)(3) organization’s net earnings may inure to the benefit of a private shareholder or individual who has the opportunity to benefit. This prohibition is aimed at preventing insiders from profiting from their charitable services. Board members, officers, directors and other key employees all qualify as insiders. The ban against private inurement includes payment of dividends, unreasonable executive compensation arrangements and transfers of property to insiders for no or below-market value.

6. Stated purpose. Your tax status may be jeopardized if you stop operating in accordance with your stated tax-exempt function. This is harder for the IRS to monitor. In general, the tax agency only acts when a nonprofit admits it’s no longer following its own mandate. For example, an organization may come under scrutiny for failing to file annual reports. The IRS investigation may subsequently indicate that its exempt function has changed.

Protect your status as a nonprofit

Spend more time championing your cause, and less time worrying about the IRS. NJ CPA firm Magone & Company can help. Give us a call today at (973) 301-2300 to learn more.