The 1099-K is an information return used to report transactions involving payment cards and third-party networks. These transactions commonly involve services such as EBay, Venmo, Paypal, Etsy, and Airbnb.
The IRS recently updated their FAQ’s for this form. In doing so, they revealed an interesting scam which many are trying which potentially increases deductible losses on their personal income tax returns. The scam involves the sale of a personal item.
Let’s say that two years ago someone purchased a computer for $800. After using it for those years, they decided to sell it for $100. The third-party network sends them a 1099-K showing the sale.
The IRS is warning that the potential loss on the sale is not a deductible item. Generally speaking we would potentially pick up the $100 sale and show the cost of the item at $800 creating a deductible loss of $700.
The Service has warned that doing so is breaking the law. We are supposed to pick up the $100 sale and show the cost at the same number, nullifying any potential loss.
It’s easy to see how such a scheme could be used in today’s day and age to substantially reduce a person’s income tax. If we think of all the durables we buy and the potential losses that could be harvested from them, it’s easy to understand what the Service is trying to stop.
The only losses that are permitted would be ones coming in the normal course of business where an entrepreneur is selling products purchased specifically for sale. In other words, it would be the sale of inventory.
Selling that snow globe you just had to buy after having it sit on your mantle for a few years, doesn’t constitute a deductible loss.
Let me leave you with this.
The Fed raised its benchmark interest rate another quarter of a percent this week. Their rate now sits between 4.75% and 5%. Many are predicting they will raise the rate at least another 25 basis points in the coming months, if not more.
The tightrope the Fed is now walking is unmistakable. They are tasked with cooling the economy to calm inflation, but hopefully not to a point where the economy recesses.
They now wander the hinterlands between a bad and a worse economy. There are two potential outcomes that we should know and understand.
The Fed Overreacts
If it turns out that the Fed has overreacted they might have slowed interest rates based on a few isolated instances. In loosening the overall financial conditions, they may have weakened the fight against inflation.
This happened back in ’87 when a newly elected Alan Greenspan slowed things down too soon. His actions did nothing but prolong and worsen the pain.
The Financial System Is More Fragile Than Expected
It’s possible that raising the rates another quarter point this week was too much. It’s possible that the problem with SVB is common throughout the entire banking industry.
This last interest rate hike could have been the straw that breaks the camel’s back. Time will tell.
Either way, we should know what’s happening and be able to react.
This is a difficult time for Entrepreneurs because we all walk that same tightrope. It’s difficult to plan for the future.
Are things going to get better? Are they going to get worse? Should you buy that equipment or that building you’ve been dreaming about? Or should you hoard your cash expecting a recession?
One thing is certain. Just about everyone is expecting the economy to recess. If it doesn’t, then that and only that would be news.
Being conservative only bothers younger entrepreneurs. It bothers them until they get their wings clipped for the first time.
Stay strong. We’re all going to get through this. Let’s get through it together.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Employee Retention Credits, M&A Due Diligence, Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,
Accounting Solutions Ltd.
Note that the only professional services provided by Accounting Solutions Ltd. are those specified in a written communication from our office detailing the scope of services to be rendered and the terms and conditions applicable to the engagement.