Accept credit cards? Important change to your record keeping

Starts with 2011 tax year. That’s this year’s tax return, filed in 2012.

New income reporting requirements will require the ability of a business owner who accepts credit cards to segregate cash sales from credit card sales. They must be reported separately on the Form 1040, Schedule C and, also, on Form 1065 (partnerships & LLC’s reported as partnerships).

MasterCard pinata, pic by Infusionsoft.

Here’s what is going to happen.

For 2011, credit and debit card companies will begin to issue 1099-K forms on payments to merchants, and third-party networks such as PayPal will give 1099-K’s to payees with over 200 sales transactions and over $20,000 in annual sales volume.
These amounts will be reported on a separate line on Schedule C and Forms 1065, 1120 and 1120S.
This way, the Service will be able to match the amounts shown on the 1099-K with what’s reported on a return, making discrepancies easier to spot. [Apparently, the IRS intends to check. Be forewarned.]

What you have to do.

If you accept credit cards and do not currently separate and keep track of both your credit card sales and your cash/check sales, start NOW.

You must also go back through the earlier part of this year (2011) and set apart the two types of sales. Easier now than later. Perhaps, you could review your sales for each month and evaluate total sales against the credit card sales reported to you by your credit card processing company. You may be able to differentiate the two types of sales from those records.

This is an effort to close the tax gap and, therefore, could potentially be a very serious matter that should not be taken lightly. Prepare.

Author Glenna Mae Hendricks is an Enrolled Agent.

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About Maesz

Glenna Mae Hendricks. She is an entrepreneur and income tax consultant, so we get lots of good tax tips from her. She is an oenophile (“look that up in your Funk and Wagnall’s,” she says), and a wine enjoyment teacher/guide who also writes wine notes at the Allen’s Retail Liquors site. Her political thoughts (and occasional outbursts of domesticity) appear at Old Feminist and Wild-eyed Liberal.