Federal Tax News for Businesses: January 2022

Reporting by Third-Party Settlement Organizations Is Changing

If you run a business and receive payments through third-party settlement organizations (TPSOs), expect significant changes in 2022. To improve voluntary tax compliance, the American Rescue Plan Act (ARPA) now requires TPSOs to significantly increase reporting of financial transactions for goods and services. TPSOs such as Zelle, Paypal and Venmo must report transactions paid to your business when they exceed $600 within the year.

Reporting is done by filing a Form 1099-K (Payment Card and Third-Party Network Transactions). Previously, Forms 1099-K were required when transaction totals exceeded $20,000 and the total transactions exceeded 200.

Business or Hobby? Tax Court Rules in 3 New Cases

The tax code allows a taxpayer to deduct ordinary and necessary expenses paid or incurred in carrying on a trade or business. However, the activity must be conducted in a businesslike manner and other requirements must be met. Recently, three different taxpayers have battled with the IRS and the U.S. Tax Court over business expenses and losses. One of the taxpayers prevailed. Here are quick summaries of the cases:

• A married couple deducted more than $25,000 in expenses related to an organic farming venture, including startup costs and amortization. They bought acreage and planned to procure USDA certification for organic farming and divide the land into farming rental property. The U.S. Court disallowed deductions related to the farming venture determining that it wasn't an active trade or business. Although the taxpayers had a business plan for a farming venture, they didn't complete any of the steps in the plan during the tax year in question. (TC Memo 2021-138)

• The U.S. Tax Court ruled that a taxpayer's horse breeding enterprise wasn't engaged in for profit. Therefore, the related deductions and net operating losses couldn't be claimed. The taxpayer's farm produces Standardbred horses, a breed used in competitive harness racing. The court found the taxpayer was intent on having a high-quality horse operation, spent significant amounts of money on it and had voluminous records. However, the records had large gaps or inconsistencies, the taxpayer had an out-of-date business plan, the enterprise was "insensitive to costs," and the activity blended business with personal elements. Thus, it wasn't conducted in a businesslike manner. (TC Memo 2021-139)

• Finally, the U.S. Tax Court ruled that a married couple's miniature donkey breeding activity was conducted with a profit motive. The IRS had earlier determined it was a hobby and the couple was liable for taxes and penalties for the two tax years in which they claimed losses of more than $130,000. However, the court found the couple had a business plan, kept separate records and conducted the activity in a businesslike manner. The couple operated the venture with the intent of turning it over to their adult daughter to help supplement her income. The court stated they were "engaged in the breeding activity with an actual and honest objective of making a profit." (TC Memo 2021-140

A Tax Deduction for Businesses Is More Valuable — Temporarily

Generally, businesses can deduct only 50% of the cost of business meals and beverages. The 2020 Taxpayer Certainty and Disaster Relief Act increased that deduction to 100% for meals purchased from a restaurant in 2022 (and 2021).

The IRS recently announced that use of that temporary full deduction has been expanded. Employers and self-employed persons who use per diem allowances to account for business-related travel may deduct 100% of the meal portion of the per diem allowance paid or incurred in 2021 and 2022. (Notice 2021-63) Here's the announcement.

Deadline Coming Up for 1099-NEC Forms for 2021

Businesses should use Form 1099-NEC, "Nonemployee Compensation," to report payments of $600 or more to nonemployees during 2021. Be aware that such payments could be subject to backup withholding in certain cases. Payers of nonemployee compensation during 2021 generally are required to file these forms by January 31, 2022.

Backup withholding could apply if the recipient of compensation hasn't provided a Taxpayer Identification Number (TIN) to the payer or if the IRS notifies a payer that a TIN doesn't match the name in IRS records. A TIN can be a Social Security, employer identification or individual taxpayer identification number. Click here to learn more from the IRS.

Could Your Business Qualify for a Disabled Access Tax Credit?

If your business makes structural adaptations or other accommodations for employees or customers with disabilities, you may be eligible for federal tax breaks. For example, there's a (non-refundable) disabled access tax credit for small businesses that have expenses for providing access to persons with disabilities.

An eligible small business is one that earned $1 million or less or had no more than 30 full-time employees the previous year. There's also an architectural barrier removal tax deduction. Businesses may claim a deduction of up to $15,000 a year for qualified expenses on items that normally must be capitalized. Click here for more details from the IRS.