How Should You Maintain Inventory in a Gig Economy?

One of the most misunderstood accounting concepts in the ecommerce and reselling space involves how to deduct your inventory costs. Small business that sell on a digital platform such as eBay, Esty, Shopify, etc. must contend with rules relating to maintain inventory.

Before 2018, all taxpayers were required to maintain inventory even if they were a cash basis taxpayer.

The Tax Cuts and Jobs Act (TCJA) of 2017 changed the inventory rules for the small business taxpayer. 

Recently in January 2021 the IRS issued final regulations to answer questions raised by the TCJA.

New Rules for Deducting Inventory

Under the TCJA a small business taxpayer (basically any business with sales under $25 million) can account for inventory for tax purposes either:

1.               as non-incidental materials and supplies (this is not new and is described below…hint: it doesn't do you much good), or

2.               as conforms to the taxpayer's method of accounting.

The TCJA raised the threshold to $25 million[1] (it was $1 million for retailers before 2018) and now allows the small business taxpayer to report inventory for tax purposes according to his or her method of accounting.

Cash method vs. Accrual method

The difference between these two methods is timing.

Cash-basis

A business that is on a cash basis recognizes revenue when cash or a cash equivalent is received from a customer. It recognized expenses (deduction) when the cost item is paid.

Accrual-basis

With the accrual basis of accounting, revenue is recognized when it is earned.  Expenses are recognized when they are incurred–which is often at a different time from when the payment is made. If a taxpayer maintains accounts payable or accounts receivable it is likely using the accrual method.

The Inventory Rules Before TCJA (pre 2018)

Most small businesses use the cash method for simplicity. Notwithstanding cash basis businesses with inventory were generally required to account for the inventory on an accrual basis.

Accordingly, a cash basis taxpayer could deduct the cost of the inventory when the inventory was sold, not when it was purchased.

The IRS regulations provided certain businesses exempt from accounting for inventory using the accrual method. These were businesses which had less than $1 million average gross receipts. (the TCJA increases this threshold to $25 million.)

If the taxpayer qualified for the alternative treatment, which included most small businesses, it was not required to account for inventory using the accrual method.

Having said that the taxpayer still had to account for non-incidental expenses but could deduct currently

“Inventoriable items as materials and supplies that are not incidental”.

The regulations provided that if you produce, purchase, or sell merchandise in your business, you must keep an inventory and use the accrual method for purchases and sales of merchandise. However, the small business taxpayer [$1 million or less of average annual gross receipts] could use the cash method of accounting even if they produce, purchase, or sell merchandise. These taxpayers had to account for inventoriable items as materials and supplies that are not incidental.

In order to understand how accounting for inventory works we have to clarify what is meant by accounting for “inventoriable items as materials and supplies that are not incidental.”

Accounting for inventoriable items as materials and supplies that are not incidental

“Not incidental” materials are those that required to manufacture your products. They are essential to the creation and selling of your product.

“Incidental” materials, on the other hand, are materials that are not directly involved in the production of your finished product.

The IRS regulations provides that “not incidental” materials and supplies are deductible in the year they are used or paid, whichever is later.

This means that all materials and supplies that are directly used to produce your goods must be accounted for:

1.               In the year you provided them as finished goods to customers, or

2.               In the year you originally paid for the material

Whichever is later.

Most businesses pay for their goods before selling them. If that’s the case, you were required to account for your inventory using the accrual method–recognizing the cost when you sell it (#1).

But if for some reason you don’t pay for your goods until after you sell them (#2), you can recognize the cost when you pay.

TCJA: “Taxpayer's Method of Accounting”

The TCJA gave the taxpayer the option to report inventory on using the “method of accounting used in the taxpayers’ books and records prepared in accordance with the taxpayer's accounting procedures.”

What is meant by the “taxpayer's method of accounting? and What is meant by “books and records”?

A “method of accounting” has the following characteristics:

•           It affects the computation of a material item;[2]

•           It is consistently applied and is predictable;[3]

•           It conforms to generally accepted accounting principles;[4]

•           It clearly reflects income;[5] and

•           It has been adopted.[6]

 

The IRS defines books as: “Except as provided in paragraph (b) [of Reg. §1.6001-1], any person subject to tax under subtitle A of the Code…or any person required to file a return of information with respect to income, shall keep such permanent books of account or records, including inventories, as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown by such person in any return of such tax or information.[7]”

Clearly Reflects Income

Neither the Code nor regulations define what clearly reflects income. The concept of “ clear reflection of income” is central to tax accounting; clear reflection of income is influenced by many factors but not controlled by any one.[8] If a taxpayer's method of accounting challenged by the Commissioner were to prevail, the taxpayer must demonstrate that the Commissioner's determination is arbitrary, capricious, and without a sound basis in fact or law.[9] A method of accounting which reflects the consistent application of generally accepted accounting principles in a particular trade or business in accordance with accepted conditions or practices in that trade or business will ordinarily be regarded as clearly reflecting income, provided all items of gross income and expense are treated consistently from year to year.[10] However, the fact that an accounting method is consistent with GAAP does not, by itself, satisfy the clear-reflection-of-income standard.[11]

An often-cited definition is found in Caldwell v. Commissioner,[12] where the Second Circuit said “clear reflection of income” means that income should be reflected with as much accuracy as standard methods of accounting practice permit.[13] The IRS generally wants to see accounting treatment that “clearly reflects income.” Historically this has meant that the deduction of the inventory should be recognized at the same time as the sale.

The TCJA specifically stated that “the taxpayer’s method of accounting for inventory for such taxable year shall not be treated as failing to clearly reflect income if such method either 1) treats inventory as non-incidental materials and supplies or 2) conforms to such taxpayer’s method of accounting.

Updated Tax Guidance (Jan 2021)

The IRS published final regulations on the TCJA in January of 2021.

The final regulations clarify in Reg §1.471-1(b)(6)(i) that costs that are generally required to be capitalized to inventory under  IRC §471(a) but that the taxpayer is not capitalizing in its books and records are not required to be capitalized to inventory. The IRS has also determined that, under this method, such costs are not treated as amounts paid to acquire or produce tangible property under Reg §1.263(a)-2 , and therefore, are generally deductible when they are paid or incurred if such costs may be otherwise deducted or recovered, notwithstanding Reg §1.471-1(b)(4) , under another provision of the Code and regulations.[14]

Additionally, the final regulations clarify that costs capitalized for the non-AFS IRC §471(c) inventory method are those costs that are related to the production or resale of the inventory to which they are capitalized in the taxpayer's books and records. Similar clarifications have been made in Reg §1.471-1(b)(5) regarding the AFS IRC §471(c) inventory method.[15]

Hence If you are not valuing your inventory, or in other words, if you are not determining your ending inventory cost balance and they are not reflected in your books and records, then it appears that you can use or continue to use the inventory cash method, which means deducting your inventory when you purchase it, rather than when you sell it.

But if you are keeping track of your overall inventory balance, meaning the total cost of everything you have on hand, or making representations about it, then you’ll need to use the inventory accrual method, meaning that you’ll deduct your inventory when sold.

It’s good practice to use the accrual method for inventory. Accrual accounting provides the best information into how a business is performing.

Notwithstanding the changes made by the TCJA and the ability to deduct costs before the goods are sold, the accrual method is recommended if your business is growing and it’s important to you to have good information about your businesses’ performance.

---

[1] The threshold is adjusted for inflation. For 2021 it was $26 million.

[2] Reg. §1.446-1(e)(2)(ii)(a) provides that a material item is any item that concerns the timing of income or deductions. In Revenue Procedures, the IRS has explained that an item concerns timing, and is therefore considered a method of accounting, if “the practice does not permanently affect the taxpayer's lifetime income but does or could change the taxable year in which income is reported. The term “item” is used to indicate any recurring incidence of income or expense. Examples include: real estate taxes, Reg. §1.446-1(e)(2)(iii), Example 2; corporate officers’ bonuses are items, Connors, Inc. v. Comm’r, 71 T.C. 913 (1979); and employees’ vacation pay, Oberman Mfg. Co. v. Comm’r, 47 T.C. 471 (1967), acq., 1967-2 CB 3, See, e.g., TAM 8201015.

[3] Reg. §1.446-1(e)(2)(ii)(a) states that “in most instances,” a method of accounting is not established without a “pattern of consistent treatment” of an item. The “consistency” referred to is consistent treatment of a particular item over time, not consistency between the contemporary treatment of different items.

[4] Reg. §1.446-1(a)(2).

[5] IRC §446(b).

[6] As stated in Reg. §1.446-1(a)(2), “A method of accounting which reflects the consistent application of generally accepted accounting principles in a particular trade or business in accordance with accepted conditions or practices in that trade or business will ordinarily be regarded as clearly reflecting income, provided all items of gross income and expense are treated consistently from year to year.”

[7] IRC §446(a); Reg. §1.446-1(a).

[8] See TAM 9603004 (advising that a method of accounting that was permissible by one taxpayer (using a sliding scale method of depreciation for television film contract rights) was not permissible by another taxpayer because it did not clearly reflect income for the other taxpayer).

[9] Ansley-Sheppard-Burgess Co. v. Comm'r, 104 T.C. 367 (1995). See Sierracin Corp. v. Comm'r, 90 T.C. 341, 368 (1988). That standard was described in Sierracin as follows:

Section 446(b) and sections 1.451-3(e), 1.446-1(a)(2), and 1.446-1(b)(1), Income Tax Regs., vest respondent with broad discretion in determining whether a taxpayer's contracts should be severed so as to clearly reflect income. “Since the Commissioner has “[m]uch latitude for discretion,” his interpretation of the statute's clear reflection standard “should not be interfered with unless clearly unlawful.” Thor Power Tool Co. v. Comm'r, 439 U.S. 522, 532 (1979).

Similarly, under IRC §482, the IRS can distribute, apportion or allocate gross income, deductions, credits, or allowances between two or more businesses under common control to prevent tax evasion or for clear reflection of income.

[10] Reg. §1.446-1(a)(2).

[11] Thor Power Tool Co v. Comm'r, 439 U.S. 522, 79-1 USTC ¶9139 (1979).

[12] 202 F.2d 112, 53-1 USTC ¶9218 (2d Cir. 1953). See also Knight-Ridder Newspapers, Inc. v. United States, 743 F.2d 781 (11th Cir. 1984), where the court found that the IRS did not abuse its discretion in forcing newspaper corps to change from cash to accrual method. Newspaper was material part of business requiring use of inventories which allowed the IRS to require the newspaper company to use the accrual method. The IRS’s consent to use cash method in earlier year did not bar the IRS from changing to accrual method during subsequent year in which it was apparent that cash method did not clearly reflect income.

[13] The problem, however, is that if taken literally, it would, among other things, virtually preclude the use of the cash method.

[14] Id.

[15] Id. Applicable date. The final regulations are applicable for tax years beginning on or after January 5, 2021.

What Income and Deductions Should be Reported or Taken on Your Tax return in the Gig Economy?

 

What Income and Deductions Should be Reported or Taken on Your Tax return in the Gig Economy[1]?

The Gig economy—also called sharing economy or access economy—is activity where people earn income providing on-demand work, services or goods. Often, it’s through a digital platform like an app or website.

Gig Economy Income is Taxable

You must report income earned from the Gig economy on a tax return, even if the income is:

• From part-time, temporary or side work
• Not reported on an information return form—like a Form 1099-K, 1099-MISC, W-2 or other income statement
• Paid in any form, including cash, property, goods, or virtual currency

What is Gig Work?

Gig work is certain activity you do to earn income, often through an app or website (digital platform), like:

• Drive a car for booked rides or deliveries
• Rent out property or part of it
• Run errands or complete tasks
• Sell goods online
• Rent equipment
• Provide creative or professional services
• Provide other temporary, on-demand or freelance work[2]

What are Digital Platforms?

Digital platforms are businesses that match workers' services or goods with customers via apps or websites. This includes businesses that provide access to:

·         Ridesharing services

·         Delivery services

·         Crafts and handmade item marketplaces

·         On-demand labor and repair services

·         Property and space rentals[3]

The Gig economy has caught the attention of the IRS so much that it has a Gig Economy Center[4]. There is even a video “Understanding the Gig Economy.[5]”

The IRS Gig Economy Tax Center can help people in this growing area meet their tax obligations through more streamlined information. The Gig economy is also known as the sharing, on-demand, or access economy. It usually includes businesses that operate an app or website to connect people to provide services to customers. While there are many types of gig economy businesses, ride-sharing and home rentals are two of the most popular. The Gig Economy Tax Center streamlines various resources, making it easier for taxpayers to find information about the tax implications for the companies that provide the services and the individuals who perform them. It offers tips and resources on a variety of topics including:

·             Filing requirements;

·             Making quarterly estimated income tax payments;

·             Paying self-employment taxes;

·             Paying FICA, Medicare, and Additional Medicare taxes;

·             Deductible business expenses; and

·             Special rules for reporting vacation home rentals.

If you are a Gig worker IRS publication 334 provides a list of forms are you required to file with your income tax return.  

What About Deductions?

Deductions are a matter of legislative grace, and the taxpayer bears the burden of proof. Section 162 allows deductions against business revenue for all expenses that are "ordinary and necessary." In contrast, Section 262 disallows deductions for personal living expenses. Determining what is an ordinary and necessary business expense versus personal living expense is often not clear cut. Deductibility can depend on the taxpayer's specific facts and circumstances and is a frequent issue to be resolved in court cases. In addition the taxpayer must substantiate his or her expenses and some expenses must also satisfy stricter substantiation requirements laid out in Section 274(d).

 

Both self-employed individuals and employees not reimbursed by their employer apply the same criteria to determine whether an item is deductible as an ordinary and necessary business expense. Self-employed individuals can then deduct amounts on Schedule C as part of their Form 1040[6].

 

Trade or Business Deductions

 To be currently deductible a trade or business expenditure:

 ·         Must be ordinary and necessary;

·         Must be reasonable in about;

·         Must be related to an activity deemed to be a trade or business;

·         Must be business related rather than personal expenditure;

·         Must not be a capital expenditure;

·         Cannot be incurred in the production of tax-exempt income;

·         Must not be a violation of public policy;

 

Ordinary means “customary and not a capital expenditure“; necessary means “appropriate and helpful.”

 Substantiation

IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses, provides detailed information on how a Gig employee can prove expenses. Proof of an expense includes the following three items:

·                     Adequate records

·                     Sufficient evidence

·                     Written record

 

Adequate records are defined by Publication 463 on page 25: “You should keep the proof you need in an account book, diary, log, statement of expense, trip sheets, or similar record. You should also keep documentary evidence that, together with your record, will support each element of an expense.”

Records of expenses do not have to be in any particular format, but it must be in a form that allows the employee to keep a detailed record of the amount, time, place, and business purpose of the expense. The format used must also enable an employee the ability to document business meals that take place within the employee's tax home and meals provided for others when away from their tax home.

To substantiate these expenses, a Gig employee must record the following information in their record:

·                     The names of the individuals in attendance

·                     The business purpose of the meeting

·                     The date and place of the business meeting

 

The best sufficient evidence is documentary evidence that supports the employee's expenses. This may include receipts, canceled checks, or bills. Documentary evidence, however, is deemed adequate only if it shows the amount, date, place, and essential character of the expense.

In most cases, the IRS requires documentary evidence for travel expenses only if the expense is greater than $75. However, there are exceptions, especially lodging expenses. Since lodging bills may contain other expenses in addition to room charges (such as meals, telephone calls, laundry, Internet access, and video rentals), a hotel or motel must provide an itemized bill. Personal expenses (such as video rentals) should not be included or reimbursed.

 

Why Business Expense Substantiation Is Vital

When a taxpayer provides the IRS with better substantiation, the IRSs is more inclined to grant deductions.

 

Deductible Expenses

This article does not cover self-employed health insurance and retirement contributions. Additionally, rules for home rentals are beyond the scope of this article. The items discussed in more depth here are auto costs; cellular phone service; internet service; work clothing; tools, supplies, and equipment; meals when not away from home; entertainment expenses; home office, licensing; and inventory, cost of goods sold, and selling expenses.

 

Auto Expenses

If you use your car for business purposes, you may be able to deduct car expenses. You generally can use one of the two following methods to figure your deductible expenses. The standard mileage rate or the actual car expenses.

The standard milage rate for 2021 is 56 cents per mile for business miles driven. f you use the standard mileage rate for a year, you can’t deduct your actual car expenses for that year. You can’t deduct depreciation, lease payments, maintenance and repairs, gasoline (including gasoline taxes), oil, insurance, or vehicle registration fees.

Choosing the Standard Mileage Rate

If you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use either the standard mileage rate or actual expenses. If you want to use the standard mileage rate for a car you lease, you must use it for the entire lease period. For leases that began on or before December 31, 1997, the standard mileage rate must be used for the entire portion of the lease period (including renewals) that is after 1997. You must make the choice to use the standard mileage rate by the due date (including extensions) of your return. You can’t revoke the choice. However, in later years, you can switch from the standard mileage rate to the actual expenses method. If you change to the actual expenses method in a later year, but before your car is fully depreciated, you have to estimate the remaining useful life of the car and use straight line depreciation.

Standard Mileage Rate Not Allowed.

You can’t use the standard mileage rate if you:

• Use five or more cars at the same time (such as in fleet operations);

• Claimed a depreciation deduction for the car using any method other than straight line, for example, MACRS;

• Claimed a section 179 deduction on the car;

• Claimed the special depreciation allowance on the car; or

• Claimed actual car expenses after 1997 for a car you leased.

 

Examples:

Example 1.

Tony and his employees use his four pickup trucks in his landscaping business. During the year, he traded in two of his old trucks for two newer ones. Tony can use the standard mileage rate for the business mileage of all six of the trucks he owned during the year.

 

Example 2. Chris owns a repair shop and an insurance business. He and his employees use his two pickup trucks and van for the repair shop. Chris alternates using his two cars for the insurance business. No one else uses the cars for business purposes. Chris can use the standard mileage rate for the business use of the pickup trucks, van, and the cars because he never has more than four vehicles used for business at the same time.

 

Example 3. Maureen owns a car and four vans that are used in her housecleaning business. Her employees use the vans, and she uses the car to travel to various customers. Maureen can’t use the standard mileage rate for the car or the vans. This is because all five vehicles are used in Maureen's business at the same time. She must use actual expenses for all vehicles.

 

Actual Car Expenses

If you don’t use the standard mileage rate, you may be able to deduct your actual car expenses. Actual car expenses include:

·                     Depreciation               

·                     Licenses

·                     Lease payments

·                     Registration fees

·                     Gas

·                     Insurance Repairs

·                     Oil

·                     Garage rent

·                     Tires

·                     Tolls

·                     Parking fees

If you have fully depreciated a car that you still use in your business, you can continue to claim your other actual car expenses.

 

Business and Personal Use.

If you use your car for both business and personal purposes, you must divide your expenses between business and personal use. You can divide your expense based on the miles driven for each purpose.

 

Example.

You are a contractor and drive your car 20,000 miles during the year: 12,000 miles for business use and 8,000 miles for personal use. You can claim only 60% (12,000 ÷ 20,000) of the cost of operating your car as a business expense.

 

Cellular Phone Service

IRC Section 280F(d)(4) was amended in 2010 to eliminate cellular phones from the definition of listed property and, as a result a taxpayer can deduct cellular phone service based on an estimate.

Courts have rules that taxpayers are required to have both cell phone and internet access for his employment as a systems engineer, and he has provided a reasonable basis to accept his estimated expenses," and, as a result, allowed the deductions for both cell phone and internet service.

 

Internet Service

The courts consider internet services a utility, and if they are ordinary and necessary business expenses, utility expenses are deductible. However, home internet services are frequently used for both personal and business purposes. Generally, the taxpayer must provide a reasonable basis for determining how much usage is business versus personal. Utilities, including internet.

 Entertainment and Business Meals

 The TCJ disallows deductions:

 ·         For an activity considered entertainment, amusement, or recreation;

·         Membership dues for any club organization for business, pleasure, recreation or other social purposes; and

·         For a facility or portion of a facility used in connection with the above.

 The amount of any otherwise deductible business meal must be reduced by 50%. This 50% reduction rule applies to all food, and beverage costs (even though incurred in the course of travel away from home) after determining the amount otherwise deductible.

 The 50% reduction rule will not apply if:

 ·         The full value of the meals or entertainment is included in the recipient income or excluded as a fringe benefit;

·         An employee is reimbursed for the cost of meal and/or entertainment (the 50% reduction rule applies to the party making the reimbursement).

 The TCJA expanded the 50% limit to food and beverages provided to employees as a de minimis  fringe benefits, to meals provided at an eating facility that meets the requirements for an on premise dining facilities, and to meals provided on premises to employees for the convenience of the employer.

 

Work Clothing

Work clothing is deductible under Section 162; these include:

·                     The clothing is required or essential for the employment;

·                     It is not adaptable to general usage as ordinary clothing; and

·                     It is not so worn.

 

Tools, Supplies, and Equipment

Expenses incurred by construction workers, electricians, plumbers, or other trades is the necessity to purchase tools and equipment are deductible. For an over-the-road truck driver, the courts allowed a deduction for a number of truck related supplies including antennas, CB and XM radio and related repairs, atlases and maps, a scanner, crowbars and other tools, flashlights and batteries, first aid kit, jumper cables, floor mats, seat covers, tarps, power cords and boosters, electrical and duct tape, towels and paper towels, and shovel and broom.

 

In general, supplies that are determined to be ordinary and necessary for the taxpayer's profession are deductible. Self-employed social workers are allowed a supplies deduction rule for computer supplies, reference materials, textbooks, and professional periodicals. Additionally, for a security guard, items such as a weapons holder, a handgun, a flashlight, and handcuffs were all considered ordinary and necessary. Also, a flight attendant was allowed a deduction for luggage.

 

Office in the Home

 

Most expenses for personal use assets are not deductible. Except for certain expenses (primarily interest and taxes) that is the case with a personal residence. However self-employed individuals are allowed a deduction for office in the home expenses if a portion of the residence is used exclusively on a regular basis as either:

                 ·         The principal place of business for any trade or business of the taxpayer, or

·         A place of business used by clients, patient, or customers[7].

 The term principal place of business includes a place of business that satisfies the following requirements:

             ·         The office is used by the taxpayer to conduct administrative or management activities of a trailer business; and

        ·         There is no other fixed location of the trailer business where the taxpayer conducts these activities.

 Taxpayers have two options for figuring this deduction.

 The regular method  divides expenses of operating the home between personal and business use. Self-employed taxpayers file Form 1040, Schedule C, and compute this deduction on  Form 8829.

 

The simplified method, has a rate of $5 a square foot for business use of the home. The maximum deduction is $1,500.

 

Special rules apply for certain business owners:

·      Daycare providers complete a special worksheet, found in Publication 587.

·      Self-employed individuals use Form 1040, Schedule C, Line 30 to claim deduction

·      Farmers claim the deduction on Schedule F, Line 32[8].

 

Inventory, Cost of Goods Sold, and Selling Expenses

In the case of businesses that resell goods, such as selling on eBay, Esty or Amazon, the taxpayer is expected to maintain inventory records, and a deduction is allowed for cost of goods sold (e.g, cost or adjusted basis of the asset). If the taxpayer cannot establish a basis, the presumption is that the basis is zero.

In addition to cost of goods sold, taxpayers are allowed other ordinary and necessary selling expenses. For example, courts have allowed deductions for PayPal fees, eBay fees, postage, and packaging.  Any fees charged for use of a digital platform would be deductible.

 

Other Common Business Expenses

Advertising;

Bad debts;

Salaries and wages;

Fringe benefits;

Rent;

Insurance;

Accounting and legal fees;

Capital expenditures which may be depreciable;

Business gifts (limited to $25).

 Other Factors Affecting Deductions

 The taxpayers tax accounting method may affect the timing of a deduction.

 Cash method taxpayers recognize expenses when paid; accrual method taxpayers recognize expenses when obligations to pay is fixed and determinable.

 Prepaid interest may be deducted over the period to which of the it accures; warranty expenses can only be deducted when paid.

 Taxpayers must be able to substantiate deductions through documentary evidence such as receipts, invoices, and cancel checks.

 Restricted Business Deductions

Political contributions by businesses and individuals are not deductible.

Lobbing expenses and amounts paid to influence voters or not deductible.

Business investigation and start-up costs, for example survey of potential markets, expenses of securing prospective distributors or suppliers, advertising, employee training are deductible in the year paid or incurred is the taxpayers is currently in a similar line of business as the start of business. If not in a similar line of business and a new business is investigated but not acquired,  start-up cost or not deductible[9].

Suggestion:

If you prepare your own return, take time now to lay out how you will keep track of these expenses and the ever -important supporting detailed records.  If you use an accountant that may already have such a format for gig workers that ties to the professional’s software, it may be easier to adopt the existing format.

Note:

In a May 2021 report by the TIGTA it noted "IRS did not always take compliance actions on non filers of tax returns and under reporters related to P2P payments even when information reporting was available," TIGTA said. In total, some 170,000 taxpayers "potentially" did not report up to $29 billion of payments received per Form 1099-K documents issued to them by three P2P payments application companies. While taxpayers using P2P payment applications may not always receive a Form 1099-K, they are still required to report any taxable income on their returns, TIGTA stressed. 

New for 2022-Reporting by third party settlement organizations. Congress has tightened the de minimis exception to tax reporting by third-party settlement organizations (TPSOs, e.g., PayPal, Venmo, Zelle) by requiring reporting of transactions that exceed $600 (and eliminating the 200-transaction threshold). The American Rescue Plan Act (ARPA) also clarified that TPSO reporting obligations are limited to transactions involving goods and services. This means that, beginning in 2022, if you run a business where customers pay you via a TPSO, and you receive more than $600 in total during the course of the year via a TSPO, the TSPO is required to report that amount to the IRS - regardless of how many customers are paying you - and to send you a Form 1099-K, Payment Card and Third-Party Network Transactions.

---

[1][1] This article is written by Frank L. Brunetti, Esq. All rights are reserved.

[2] Note: This list does not include all types of Gig work.

[3] Note: This list does not include all types of digital platforms.

[4] https://www.irs.gov/businesses/gig-economy-tax-center

[5] https://www.irsvideos.gov/Individual/PayingTaxes/UnderstandingTheGigEconomy

[6] Since 2018, employees can no longer deduct unreimbursed employee expenses. These expenses were included as part of miscellaneous itemized deductions and that category was eliminated by the Tax Cuts and Jobs Act (TCJA).

 [7] From 2018 through 2025 employees are not allowed an office in the home deduction.

 [8] See IRS Publication 587, Business Use of Home (Including Use by Daycare Providers) and Form 8829, Expenses for Business Use of Your Home for more information.

 [9] Deduction of start up expenses are subject to special rules see IRS Publication 535.