By Mark E. Battersby / Published February 2023
When it comes to cash, every pressure cleaning business faces a two-way street. On the one hand, it may be necessary to report even routine cash payments made to suppliers and others. On the other hand, not only will many of those with whom you conduct business be required to report the funds paid to your operation, but payments funneled through third-party apps will be joining transactions conducted via credit cards.
That’s right; payments received via third parties have now been added to the reporting requirements for cash payments in excess of $10,000. This latest rule was included in the American Rescue Plan, the $1.9 trillion stimulus package, and changed tax reporting requirements for third-party payment networks.
Today, every pressure washing business, as well as persons engaged in a trade or business, making “reportable” transactions during the year must report those transactions to the IRS as well as furnish a copy of the information return to recipients. But what transactions are reportable?
The IRS’s 1099 forms are a collection of tax forms that document different types of payments made by both individuals and businesses. Businesses are required to issue a 1099 form to a taxpayer (other than a corporation) that has received at least $600 or more in non-employment income during the tax year. Among the many types of 1099 forms used for the many types of non-employment income, the following are the common ones:
Naturally, since the IRS considers all Form 1099 payments as taxable income, recipients are required to report payments shown on Form 1099.
Obviously, receiving $10,000 from a customer may not be an everyday occurrence, and even cumulative payments in excess of $10,000 from one customer are rare in most pressure cleaning businesses, but the government wants to know about them—sometimes. The law requires every business to report cash payments of more than $10,000 by filing Form 8300, Report of Cash Payments Over $10,000 received in a trade or business. That means transactions such as the following will require filing a Form 8300:
Cash, according to the IRS, includes “the coins and currency of the United States and a foreign country.” Cash does not include personal checks drawn on the account of the customer or a cashier’s check, bank draft, traveler’s check, or money order with a face value of less than $10,000.
On occasion there may be situations where the pressure washing contractor or business operator is suspicious about a transaction or transactions. According to the IRS, a transaction is suspicious if
In addition to reporting suspicious transactions by simply checking the appropriate box on Form 8300, the business can voluntarily file a Form 8300 in those situations where the transaction is $10,000 or less and suspicious.
The information contained on the form will, reportedly, assist law enforcement in its anti-money-laundering efforts. When a pressure cleaning business complies with the reporting law, it is providing authorities with an audit trail to investigate drug dealing, terrorist financing, and other criminal activities—and possible tax evasion.
Under the earlier law, the IRS required payment card and third-party networks to issue a Form 1099-K, Payment Card and Third-Party Network Transactions, to report certain business transactions that involved the following:
The new law requires these transactions be reported to the IRS and users to receive Form 1099-K for payments of goods and services over $600 without any needed minimum transaction, which means more contractors will receive the forms. In other words, anyone receiving $600 or more in payments for goods and services through a third-party payment network, such as Vemno or CashApp, will have these payments now being reported to the IRS.
That’s right; beginning January 1, 2022, third-party payment network providers will be required to send users a Form 1099-K for transactions made during the 2022 tax year by mail or electronically. The new reporting requirements will impact 2022 tax returns filed in 2023.
Form 1099-K, Payment Card and Third-Party Network Transactions, is yet another information return the IRS requires for reporting payment transactions in an effort “to improve voluntary tax compliance.”
For the record, while these new rules apply to most third-party payment networks, ZELLE is not, according to them, subject to the law. The law says only third-party payment companies that transfer funds from a buyer to a seller are required to send Form 1099-K to users. Apparently, ZELLE doesn’t settle funds but rather provides messaging between a financial institution and people making the payments.
With more and more businesses, including many in the pressure washing industry, beginning to accept and use cryptocurrencies such as Bitcoin and Ethereum and ether, it should be no surprise they continue to draw the attention of lawmakers. The IRS wants to track these transactions. Legislation currently being proposed would make digital assets such as cryptocurrencies subject to the constructive sale rules.
Under the constructive sale rule, an appreciated position is treated as constructively sold if the taxpayer enters an offsetting financial position of substantially identical property. If enacted, this would mean a business owner or investor would need to carefully track their cryptocurrency transactions as well as their basis or book value. This is especially important if multiple cryptocurrency exchanges or wallets are used.
A little closer to home, new reporting requirements for cryptocurrencies were already in place after recent legislation. Brokers are required to report cryptocurrency transactions on Form 1099-B and must include a customer’s basis beginning after 2023. In addition, digital assets are now treated as “cash” for purposes of the rules requiring information reporting by any pressure washing business receiving cash transfers of more than $10,000.
Reporting any income has always been a requirement when filing taxes with the IRS. The idea is that reporting requirements, both existing and proposed, will reduce the so-called “tax gap”—the difference between the taxes owed the government and the amount actually received. However, with all the new reporting requirements comes concern that expanding the IRS’s access to this information can only raise privacy concerns.
It is becoming more and more difficult to overlook or forget about the pressure cleaning operation’s income with payees and payor middlemen facing civil penalties should they fail in their expanded role as “tattletale.” The good news is that while reporting all income received to the IRS has always been required, deducting the expenses incurred earning that income remains an option. The current downward fluctuations of some cryptocurrencies may also mitigate the effect of those newly proposed rules on cryptocurrencies.
Almost any recordkeeping system works for the average business. Records can be saved either in electronic form or manually. All the IRS requires is that whatever system is chosen reflect the pressure cleaning operation’s income and expenses.
The question of how long to retain those records doesn’t have a concrete answer. For example, 1099 Forms (including Form 1099-K) should be kept for six years since the IRS has six years to contact anyone who has failed to report income. It’s seven years for any information regarding loss from worthless securities or bad debts.
More specifically, every contractor or business should keep a copy of every Form 8300 it files along with the required statement it sent to customers for at least five years from the date filed.
The reporting rules that are already on the books and many of those proposed will impact almost every transaction used by the business for its goods and services—not just third-party payment services such as PayPal and Venmo. This includes bank accounts and other ways the operation sends and receives money.
Failure to adhere to the cash reporting rules, just as with failing to report income on the annual tax return, can lead to massive fines and penalties. Thus, consider the need for professional guidance when attempting to navigate the murky cash reporting waters.