Understanding the Latest Modifications to Form 1099-K Reporting Requirements

There has been updated guidance on how and when tax filers must file and report Form 1099-K, Payment Card, and Third-Party Network Transactions in 2022 and 2023. According to the December IRS release, new income and transaction reporting requirements for so-called third-party settlement organizations (TPSOs) have been delayed for one year.

A TPSO, according to the IRS, facilitates payments to “participating payees” of the platform. This type of organization can be an online marketplace, an app, or payment card processors that are used to facilitate commerce transactions. It could be a digital marketplace that holds auctions or items for sale that functions as a nexus between those selling items and those buying the items. The TPSO also is tasked with reporting the total amount of transactions to the IRS and the payee or individual who receives remittance(s) from the TPSO in conjunction with selling an item on an auction website or similar platform, based on the new $600 tax calendar year threshold.

The previous reporting threshold (which is in effect for filing taxes for the 2022 calendar year) for TPSOs to be mandated to report to the IRS was:

1. More than 200 transactions occurring annually

2. More than $20,000 in sales annually

Originally set to take effect for the 2022 tax calendar year and mandated in the American Rescue Plan (ARP) of 2021, the new reporting threshold is triggered when more than $600 is earned in aggregate for a single tax year, without regard to the number of transactions per calendar year. It will take effect starting Jan. 1, 2023.

When it comes to calculating tax obligations, it’s important to notice how differences exist between gains and losses. For example, the first step is to determine whether there’s been a sale or a loss. If there’s a gain, it must be reported on Schedule D and Form 8949.

Depending on the outcome of the sale (a gain or loss) the IRS gives guidance accordingly. If it’s a gain, when it comes to accounting for fees paid in conjunction with the item’s listing, the selling expenses should be reported as “a downward adjustment” on either Form 8949 or Schedule D. Another consideration on sales of personal items is determining whether it’s a short- or long-term gain. Items sold that are held for more than one year are recognized as long-term. If the item sold has been held for one year or less, the capital gain is recognized as short-term. But when it comes to losses, the IRS doesn’t permit filers’ deductions.

There is one important distinction between online sellers and “personal transactions” with the 1099-K Form. When items are sold for a profit, the 1099-K Form intends to ensure income earned is reported to the IRS (and state revenue agency). However, if family members or friends are using such “third-party payment platforms” to split a purchase (for a meal, entertainment, ride-share, reimbursing a bill payment, etc.) such transactions are excluded because they qualify as “personal transactions” under IRS guidance.

With the guidance for smaller transactions evolving, which will undoubtedly impact more and more filers, individuals and those professionals helping them will undoubtedly have to keep an eye on future changes to 2023’s Tax Code.

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Defining an Impaired Asset

When it comes to defining an impaired asset, its fair market value is worth less than the original cost of the asset – or more formally, its carrying value. As a company re-evaluates its assets’ value, and when it determines there’s a discrepancy between the book or original value and the current market value, impaired assets that are lower in value are written down on the balance sheet. The business’ income statement shows a loss for the negative difference in value. Impaired assets can be Property, Plant, and Equipment (PP&E), goodwill, or fixed assets.

Making a Judgment on Asset Impairment 

One more consideration to get an accurate calculation, according to generally accepted accounting principles (GAAP), is to ensure that accumulated depreciation is subtracted from the asset’s historical or original cost before assessing the difference between the fair market and carrying values. Equally as important is the GAAP recommendation for businesses to perform impairment tests annually.

Assets could be damaged physically, consumer demand may change, or legal factors could reduce their fair market value. These reasons may cause lowered projected future cash flows – lower than an asset’s current carrying value. It, therefore, requires an impairment assessment. 

Illustrating With a Real-World Example

Take a business that bought a piece of equipment 24 months ago worth $500,000 and depreciates at $25,000 annually. Using these two figures, we can determine the equipment’s carrying value as follows for the present year:

[($500,000 – ($25,000 x 2 years)] = $450,000

If the same type of asset (same age, usage, etc.) can be purchased on the open market but is able to be purchased for $400,000 (market value), the asset the business owns would be considered an impaired asset.

The difference between the current market value and the carrying value is $450,000 – $400,000 = $50,000. The $50,000 would be written down.

It’s important to note that once an asset is impaired, depreciation going forward must be recalculated based on the new valuation figure.

Criteria to Establish Impairment

According to GAAP, businesses must begin with a recoverability test. If the initial cost of an asset (minus any depreciation or amortization) is more than the non-discount rate adjusted cash flows it’s projected to produce, the asset is considered impaired.

Assuming the asset is deemed impaired, the second part determines how much impairment exists, which is the gap between the original and market value of the asset in question. If the fair value is unspecified, the total of the discount rate adjusted future cash flows are acceptable.

Assuming the total of non-discount rate adjusted future cash flows is $90,000 – the projected undiscounted cash flows through the next 36 months, which is lower than the estimated carry amount (or book value) of $115,000. The recoverability test is passed, so the asset should be impaired. Based on the second step, the impairment loss will be $25,000 ($115,000 – $90,000). If, however, the fair market value is unknown, the projected cash flows of $30,000 per year for the next 36 months should be discounted to present value. This example can assume a 5 percent discount rate:

Year 1 – $30,000 / (1+0.05) = $30,000 / 1.05 = ($28,571.43)

Year 2 – $30,000 / (1+0.05)^2 = $30,000 / (1.1025) = ($27,210.88)

Year 3 – $30,000 / (1+0.05)^3 = $30,000 / (1.1576) = ($25,915.69)

To calculate the impairment loss with an unknown fair market value: $115,000 – ($28,571.43 + $27,210.88 + $25,915.69) = $115,000 – $81,698.00 = $33,302.00

Whether it’s a time of economic uncertainty or the economy is firing on full cylinders, assets can change value. Businesses that effectively navigate changing conditions are able to increase their chances of surviving or thriving amid the challenges they might face.

Why You Might Not Need a New Budget for the New Year

So, we’re a month into 2023 and the sheen might’ve dulled from all your shiny, New Year’s resolutions. Though diet and exercise are the top things you might want to change, there’s one you might not need to touch – your budget. Here’s a discussion about who does and doesn’t need to revamp their finances.

Who Needs a New Budget?

Budgets are always a good idea. They help you save money and pay off debt. But only a few folks need to create a new one. According to Annette Harris, founder of Harris Financial Coaching, you need a new budget if you are:

  • Unable to keep up with expenses
  • Falling behind on debt payments
  • Borrowing money from others
  • Relying on credit cards
  • Using payday lenders

But on the flipside, some positive life events may also call for a fresh look at your budget:

  • Buying a house
  • Planning home improvements
  • Sending a child to college

Now, if you’re debt-free, saving and investing, then a new budget probably won’t provide much value. Further, Harris says that if you don’t have children that you’re putting through college, don’t have any upcoming big purchases, continue to spend wisely and build your net worth, don’t bother changing what you’re already doing. In other words, of it’s not broke, don’t fix it.

The Stigma Around the ‘B’ Word

That would be “budget.” Jesse Mecham, founder of the app You Need a Budget aka YNAB, has a good explanation about why this is so. He says that this very term (budget) is among the reasons that people don’t follow through with setting one – and sticking with it. He says that generally, people think it means restriction, deprivation or diet. What you need, he says, is a shift in perspective. If you think about a budget being a plan for intentional spending, no matter what year it is, you always want to be intentional. Makes good sense, right?

Some Budgets Might Even Cause Harm

Dana Miranda, founder of the “budget-free” financial ed website Healthy Rich, believes that budgets can do more harm than good. She says that people inevitably feel like they’re failing and aim for a fresh start at the beginning of the year; but no amount of recommitting to budgeting can make the realities of your life fit into the unrealistic restriction of a budget. Miranda says when people are stressed about money, they budget. When they succeed, it’s great. But when they fail, they feel like a failure and, consequently, are even more stressed. Much like dieting.

Alternatives to Budgeting

Here are three other ways to get a handle on your finances in the New Year.

Track Your Goals

We’re not talking about counting every dollar, but focusing on goals. Instead of not overspending, eating out less or avoiding online shopping, find areas in your budget that can help you accomplish your goals – one at a time. For instance, if you want to save for college for your kids, buy an investment property, or create a vacation fund, set up a tracker with a defined timeline and work toward that. It’s easier to narrowly focus on one important goal than on everything all at once.

Create an Annual Budget

This is in contrast to a monthly budget. This helps you accommodate for variables – life stuff – that inevitably come your way and knock you off course. According to Harris, take time to map out monthly costs, travel plans, and home renovations, along with any one-time and variable recurring costs. The bills you pay regularly are easy to anticipate; it’s the ones you don’t that will throw you a curveball.

Look at Your Relationship With Money

Ask yourself things like:

  • Do I find joy in the way I make money?
  • Are the commitments I made (like a monthly savings amount) still working for me?
  • Am I achieving what I want?
  • Am I at peace with the way I spend?

Harris says self-awareness found through journaling, meditation, yoga, and prayer are great ways to harness conscious spending. They contribute, she says, to helping you become more intentional with the way you spend.

No one is perfect. Everyone makes mistakes. However, with a few helpful hints like these, you can get better and better every day.

Sources

https://www.forbes.com/advisor/personal-finance/new-budget-new-years-resolution/

2022 Consumer Saving & Spending Behaviors (bankofamerica.com)