We’re seeing more and more 1099-Ks reporting third party settlement transactions this year and many of you have had questions about them.
Why is this happening? Starting in TY2017, the Massachusetts DOR lowered the level for reporting third party settlement transactions (e.g., PayPal) to $600 for payees with a Massachusetts address. This is significantly more encompassing than the IRS level of $20,000 per payee and a minimum of 200 transactions. The end result is that we in Massachusetts are seeing more 1099-Ks.
The DOR has answered some frequently asked questions about this new rule here.
Are 1099-Ks in scope? Yes, they are – within the limits defined in the Tax-Aide Scope Document (available on the One Support Help Center).
How do we handle a 1099-K? If a taxpayer has a 1099-K, it is important to determine what the income represents. It can be income from a small business, personal property sales (i.e., online garage sale), a simple transfer of funds from one person to another, or any combination thereof.
We recommend the following course of action for each 1099-K presented:
1) Determine if the 1099-K is for a business, sale of personal items, funds transfer or combination of the three. Work with the taxpayer to determine how much is allocated to each of these categories.
2) For that portion that is business related, determine if the business is in scope (see Tax-Aide Scope Document for Schedule C restrictions). Refer taxpayers with out of scope returns to a paid preparer. If it is a small in-scope business, click on the 1099-K link on the TaxSlayer income page (see 4012, page D-13) and create a Schedule C, listing the 1099-K income on the first line. Deduct all business expenses on the appropriate lines as you would for any small business.
3) For that portion that reflects personal property sales where the sales price is not higher than the original purchase price there is no taxable event and the amount can be ignored.
4) For that portion that is for a funds transfer to another party (e.g., repayment for dinner, etc) there is no taxable event and the amount can be ignored.
5) If any portion of the 1099-K is determined not to be a taxable event, you should note the amount and rationale in the taxpayers’ file (using either a TaxSlayer note or including something in writing in the taxpayer’s envelope) – that will help if there are any future questions.
6) Advise the taxpayer it is possible they could get a letter of inquiry from one of the tax agencies and either tell them how to respond or advise them to call us if it happens.
As always, if you have any questions, please forward them through your management chain for resolution.