BA Harris LLP

New Reporting Requirements for Credit and Debit Card Payments

Published on Wednesday, January 05, 2011

The Housing Assistance Tax Act of 2008 enacted Internal Revenue Code section 6050W requiring organizations (banks, credit card companies, others) who settle credit/debit card transactions to report on a new 1099-K form the amounts settled with “payees”. This new rule is effective January 1, 2011. As an example, if your business collects and deposits credit card payments from customers totaling $30,000 during 2011 your credit card company is required to issue you a 1099-K reporting the amount they “settled” with you, or $30,000. The new rules also require taxpayers who accept credit/debit cards as payment to segregate card payments received during the year on their tax returns as a separate line item of gross income.

For example, if your business reports $1,000,000 in revenue during 2011 and $400,000 of the revenue is from payments received via credit/debit cards, your business tax return is now required to report $400,000 of revenue collected from cards and $600,000 of other revenue. To insure you report correctly, the bank, credit or debit card company will be filing a 1099-K each year with the IRS to report the amount of credit/ debit card receipts you collected during the year. The IRS will be attempting to match this with your tax return. This means your accounting system, whatever it may consist of, will need to capture credit/debit card payments received so such payments can be properly reported on your income tax return.

This new rule is certain to cause confusion and problems. Consider the situation where a business customer pays you $1,000 during the year on a credit card and that the customer historically would report these payments on form 1099-MISC. If you are not familiar with some of the specifics of the new law, income may be reported by your credit card company on form 1099-K but also on form 1099-MISC prepared by the customer who paid you. The new law now exempts reporting on 1099-MISC those payments made by credit or debit card. However, assuming you are even aware of this exemption, you will need to be able to track payments made by credit cards versus by check. This is necessary because only those payments made by means other than credit/debit card will now be subject to 1099-MISC reporting. Payments you made by credit card will not be required to be reported on 1099-MISC.

If this sounds complicated just wait until the new 1099 rules enacted by the “health care reform” legislation become effective in a couple years. Unless repealed by Congress, the new 1099 rules will broaden the scope of required 1099 reporting to include most payments whereas only payments for services and rents to unincorporated businesses are currently covered.

The few paragraphs above are not intended to present all details of the law or to provide a solution. Our point in providing this information is to alert you to these changes so you can take action and consult with your advisors in order to comply. Feel free to give us a call if you wanted to discuss the applicability of these or other rules to your business.

Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing contained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting or marketing of any of the transactions or matters that it addresses.

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