Pay Pal 1099s

[Possi]

While I am looking for test sites for the Registered Tax Return Preparer exam, I have also had a question rolling around in my head about Pay Pal and 1099s. It is my understanding that PayPal is issuing 1099s for sales/deposits now, but I'm not sure when that begins. I'm just wondering how best to deal with it when it happens. I have a few people who I KNOW will be surprised, thinking they are just selling their own stuff, and that it is not a taxable event.

If someone is selling their own personal things on paypal, and they are issued a 1099, does that land on a Sch D? It is almost always a loss, but as a personal loss, they would bring the loss to zero on the Sch D.

If someone is selling merchandise they bought TO sell, and it is clearly run as a business, it would land on a Sch C.

Do you think there will be a big fallout from these 1099s, and do you see an issue with the way it will be reported? Sch D vs Sch C?

[Bees Knees]

Yes, 1099-K will be an issue this year. People selling personal stuff on e-bay wil get 1099s, and won't be very happy about it.

The good news is IRS has acknowledge this to be an issue and says in their 2011 Schedule C instructions to enter zero on the 1099-K line and report total receipts (including those reported on 1099-K) on the next line.

That tells me IRS has no plans to match 1099-K income on 2011 returns.

[Jiggers]

I think the filing requirement limit for 1099-K is $20,000 or 200 CC payments.

Selling that much on e-Bay or elsewhere sounds like a business.

[ChEAr$]

If ebay and PaYPAL WILL SEND out the 1099K forms, what will they do for social security numbers? Is that now a requirement to use either service?

IMWTK.

updated: Paypal evidently is asking for ssn's since they are a conduit for business payments. However
for ebay:

"eBay will never ask for your password or credit card in an email. Never give out personal information by clicking on a link in an email. Instead, go directly to www.eBay.com to update account information to ensure that your information is being securely processed by eBay. "
that from the horse's mouth.

[Possi]

All Sch C?

Yes, 1099-K will be an issue this year. People selling personal stuff on e-bay wil get 1099s, and won't be very happy about it.

The good news is IRS has acknowledge this to be an issue and says in their 2011 Schedule C instructions to enter zero on the 1099-K line and report total receipts (including those reported on 1099-K) on the next line.

That tells me IRS has no plans to match 1099-K income on 2011 returns.

Does this mean that all 1099K income will eventually fall on the Sch C with no option for Sch D?

BTW, my niece sold most of her own personal things last year on ebay. She isn't in the business of selling her personal things... she just cleaned house. Everything she sold, she sold for much less than she bought them for, but there is no proof.

If the matching rule were to be in effect, how would I report it?

[Koss]

SSN or TIN

I don't think e-Bay will be issuing 1099s. Those who sell a lot of stuff on e-Bay will receive a 1099, but it won't come from e-Bay. e-Bay is the auction site, but it is not the payment processor.

When you buy stuff on e-Bay, it is not e-Bay that collects the money on behalf of the seller. Many of these payments are made through PayPal. Those that don't go through PayPal go through something else--an electronic shopping cart, or e-commerce platform, that accepts cards. Somewhere on the back end there is a financial institution. In order to accept electronic payments, through PayPal or any other e-commerce platform, the seller must have opened an account with a financial institution. PayPal is a financial institution, and so are all the other e-commerce payment platforms. The sellers have provided an SSN or TIN to whatever entity is actually processing the payments.

BMK

[Koss]

Reporting of the Income

No, I don't think it will all have to go on Schedule C.

This is probably going to turn out exactly like the question of whether, and when, it is ever permissible to report income from 1099-MISC Box 7 on line 21 of Form 1040.

The question, of course, is exactly the question you raised: Is it a trade or business?

The IRS may reasonably infer that the sales are a trade or business if the gross exceeds a certain amount, so they might, in future years, be looking to match data from 1099-K with Schedule C. But the inference may be wrong.

Someone who is moving, who sells a bunch of stuff at a garage sale, is not in the trade or business of selling things, so you are correct that the sales would go on Schedule D, and that most of the sales would result in a nondeductible loss. I don't think it's any different if you sell your stuff on e-Bay.

But you do have a good point in that if you report it on Schedule D, and the IRS does a correspondence audit because the matching fails on Schedule C, then you might be required to establish the basis, which can be tough for personal property you've had for years.

The IRS has posted a draft of Form 1099-K, and there are some tentative instructions available for the payer, who has to file the form. But they haven't posted any instructions for the recipient.

My prediction is that the instructions for the recipient will say to report it on Schedule C if the payments arose out of a trade or business, and to report it on Schedule D if the payments arose out of the sale of capital assets.

Some payments might even belong on some other schedule. And some might not even be taxable income.

PayPal can be used by someone that wants to send money to a family member. That's a gift. It's not taxable income. It's also a very strong argument for having a separate PayPal account for business activities.

Although I have not actually seen this done in practice, I see no reason why PayPal, or any other credit card payment processor, could not be used to collect rent. The payment might belong on Schedule E.

It is not the reporting document or the information return that determines the taxation of an item. Rather, it is the nature and character of the transaction that determines its tax treatment.

BMK

[Bees Knees]

The final version of the 2011 Schedule E also has a line for 1099-K income, with similar instructions saying to enter zero on that line and total rental income on the next. There are also lines on the Schedule F, 1120, 1120S, 1065, etc. for 1099-K gross receipts. So to answer the Schedule C question, the answer is no. Just because you get a 1099-K does not mean it will be assumed to go on Schedule C. Obviously in future years it will be matched to the taxpayer's return, but you can't assume it is for Schedule C only.

[Bees Knees]

Just a side note about 1099-K reporting. Last night I had take-out from one of our local restaurants and paid with cash. The guy hit the open drawer button on the cash register and made change for me without ringing up the sale on the cash register.

IRS knows this happens all the time. With all the fighting on how to balance the budget, you can understand why the government wants 1099s issued for everything.

[Jiggers]

Just a side note about 1099-K reporting. Last night I had take-out from one of our local restaurants and paid with cash. The guy hit the open drawer button on the cash register and made change for me without ringing up the sale on the cash register.

IRS knows this happens all the time. With all the fighting on how to balance the budget, you can understand why the government wants 1099s issued for everything.

I wonder if the owner of the business knows this?

A few years back, my CPA employer noticed that same thing at a local convenience store that he prepared a tax return for. He asked the owner/employer if his cash register was broke. The owner/employer confronted the employee and found out that all employees did this. Fired all of them. And then sold the business.

[Possi]

Re-name it

Re-name it the 1099-scare

It will sure shake some people up, won't it?

I don't see how in this world the IRS could possibly require me to produce receipts for things I bought years ago, and sold for chump change, even though that chump change added up to thousands. I paid taxes on it when I bought it, with money that I paid taxes on. This is one loop I can't see closing.

Am I naive?

I'll be at the NATP 2-day seminar Wed and Thurs, in Windsor, CT. If you are there, say hello.

I'll pose this question, too.

~donna aka possi

[Koss]

Basis

I agree that it would not be reasonable for the IRS to expect a taxpayer to produce receipts for things like books, dishes, appliances or furniture that were purchased for personal use many years ago.

But at least in theory, in a full-blown audit of the Schedule D, without receipts, you would have to develop, or propose, some other method of determining the basis.

If we all agree that the sales proceeds for a particular asset sold on e-Bay was less than the basis (which, in most cases will in fact be what the taxpayer paid for it, if it was a personal use capital asset), then we all agree that there is no taxable gain, and that the loss is nondeductible.

So when you are preparing the Schedule D, it might be okay to just let the client make up some number that is a rough estimate of what they paid for it.

But that won't fly in an audit. If the Schedule D is audited, you'll have to do something else. You can use a reasonable estimate, but it has to be based on some sort of external data source. It can't just be a wild guess by the taxpayer.

One way of estimating the basis of something like a sofa or a set of barstools would be to find a comparable product that is brand new and currently for sale, and adjust the price downward for inflation, based on the year the taxpayer purchased it.

As for how to establish when the item was purchased... well, I dunno. You might have to simply argue that the taxpayer's testimony is the best and most reliable evidence of when it was purchased. And what if they are mistaken? If you move the purchase date forward or backward in time by a few years, it won't make a difference, because the price of the item won't change that much. They still won't have a taxable gain. Present it that way, and the auditor may realize that it doesn't matter that much whether they bought it six years ago or four years ago.

For stuff sold on e-Bay, the taxpayer should have a digital photo of the items that were sold. Clients should start keeping those photos for about four years.

Hmmmm?

BMK