Tax Change Affects 26 Million SMBs

by Steven Aldrich, CEO of Outright

It’s not often that a tax law change completely changes the tax landscape for the 26 million small businesses in the U.S – but it happened last year. Internal Revenue Code Section 6050W was passed in 2008 and was implemented for the first time for Tax Year 2011. This law had a major effect on businesses across America, while also opening up a huge opportunity for tax professionals to help small businesses.

The government passed this law with the intention of closing the “Tax Gap” — the estimated $385 billion that the U.S. government loses from the under-reporting of income. As a requirement of Section 6050W, merchant processors and third-party payment processors, such as PayPal and Square, are required to report the gross sales that individuals and small businesses were paid through their services to the IRS on Form 1099-K. The IRS estimates that 53 million of these forms should have been sent for tax year 2011, making it the 10th highest volume tax form in it’s first year of existence. That’s a lot of small businesses being affected, including millions of businesses who previously chose to prepare their taxes alone and now need help from a tax professional.

The challenge for small businesses receiving this form is that the 1099-K reports “gross sales”, without adjusting for items like fees, refunds, returns, or fraudulent transactions. The truly small businesses, the 21 million sole proprietors who file Schedule C forms, are getting very confused by the numbers appearing on the 1099-K. Outright, the online accounting software, spoke with many of their customers who did not understand the difference between the gross sales number on their 1099-K and the profit that they should be taxed on. Thus, the gross sales number on the form came in much higher than they expected and caused many businesses to spend significant time and money to get their taxes done correctly. We, at Outright, foresee that there will be a huge opportunity for tax professionals to market to and understand the needs of these sole proprietors who will be seeking help figuring out what the 1099-K means for their taxes.

Tax professionals who market to this segment should get familiar with the 1099-K form and with ecommerce tax laws, since many of these businesses are selling their wares online. These businesses will have specific questions about how to account for cost of goods sold, refunds, selling fees, and commissions (for those who sell items online on behalf of others).

While IRS 6050W has created waves of discontent amongst those affected, it is a rare opportunity for tax professionals to serve an entirely new market and reach new clients.

About the Author
Steven Aldrich, CEO of Outright, is an expert on all things tax-related. He can discuss the latest legislation, Quarterly Estimated Taxes, 1099-K, trends and technology that makes managing all of this easier.