New income tax rules may be ‘burdensome’ on small business owners: Expert

Geltrude & Company Founder Dan Geltrude explains which new tax provisions that small business owners or online sellers should be aware of.

Video transcript

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DAVE BRIGGS: Small business owners who use fintech platforms like PayPal, Venmo, and Cash App to complete transactions must be mindful of a new reporting rule from the IRS. As a result of the American Rescue Plan Act, anyone earning over $600 for a business-related transaction will have their income reported to the IRS. Now, this is a significant change to prior policy, where Americans only reported payments over $20,000 to the IRS.

To help us explain what this means for business owners, Dan Geltrude, Gertrude & Company founder, joins us now. Good to see you Dan. What do we need to know, and why was this change made?

DAN GELTRUDE: Well, let's start off with this. The reason why this is getting attention right now is because it's effective for 2022. So now that we're right at the end of the year, everybody's saying, wait a minute, this is happening? This was part of the American Rescue Plan. And basically what it said, as you said before, transactions now, gross transactions over $600, are now going to be reported to the IRS on Form 1099-K.

And the reason this is important is, is because the IRS gets that form, and then they match it to your tax return. Now, when it doesn't match, well, that's when you hear from the IRS. But this is problematic. Let me give you an example.

Let's say on eBay you sell something for $1,000. Now, that's over the $600 new threshold. But you paid $900 for it, so your profit was only $100. But on your tax reporting, it's going to say a thousand. Now you, as that small business owner, let's say, you have to have that support that it cost you 900 so that you're only taxed on the profit of 100 and not the gross of 1,000. So you see what the problem is here?

SEANA SMITH: Yeah, Dan. I mean, it's hard to kind of, I think, grasp at exactly the impact that this is going to have on small businesses because when you take a step back, it looks like it shouldn't really be that huge of an impact given the way that it just seems like an adjustment in reporting.

But I think a lot of people, a lot of small businesses, a lot of entrepreneurs, when they're starting their new business, they're a little bit intimidated by the tax system and what they need to do, how they need to position themselves in order to best, I guess, capitalize and take advantage of certain opportunities that they have. So if you had one piece of advice for small business owners when it comes to their taxes, what would that be?

DAN GELTRUDE: Well, for right now, what I would say specifically related to this rule, you need to keep all the supporting documentation to be able to prove out your income because if the IRS comes a'calling, the burden of proof is on you! So when they say, like in my last example, you had $1,000 of taxable income, you need to be able to prove, wait, I had $900 of cost, my profit was only $100. So the key here is to make sure you have all the supporting documentation for these transactions. And that's burdensome.

DAVE BRIGGS: Burdensome is the word. And this is why, Dan, so many feared that story when we heard about 87,000 new IRS agents getting hired. What are you hearing from small businesses across the country when it comes to their fears of added taxes and regulations, what they need from the government?

DAN GELTRUDE: Well, any time that you have those three initials being spoken of-- I-R-S-- you have small businesses that are very concerned. Look, small businesses don't always have the resources to be able to keep everything, let's say, in the type of order that a large company with an entire accounting department would have. So there's always that fear not necessarily that you're not paying your proper amount of taxes, but that you may have simply made a mistake, and now you're in trouble.

So that's really the big fear that small businesses have. Do we have the resources to really be able to defend ourselves if we're up against the IRS? And for the most part, the answer's no.

SEANA SMITH: Dan, real quick, just a-- I guess the most common mistake that you see small businesses making when they do file their taxes?

DAN GELTRUDE: Well, they're-- depending on how they go about their taxes, but the biggest mistake that I see is them not understanding deductible expenses. And what ends up happening is they end up actually paying too much tax 'cause they're not aware of things that they can take advantage of as far as deductions.