educational

Recent U.S. Tax Law Changes

Most savvy entrepreneurs or business people understand that tax and accounting should not be an afterthought. With politicians and lobbyists looking for ways to raise revenue, there is an ever-pressing need to be aware of how both domestic and international tax laws impact your company's business model and strategic goals.

We believe that being informed of corporate tax matters is the first step towards making sound business decisions. This article marks the beginning of a six-part article series aimed to provide tax updates applicable to the Internet industry.

In this series, we'll explore recent U.S. tax law changes and new reporting requirements; international tax structures; inbound and outbound transactions; state income, franchise, payroll, and sales and use tax filing requirements; how and in which state to incorporate a business; and how to choose the best entity type for your business.

New Reporting Requirements
Starting in 2011, under the new law Housing and Economic Recovery Act of 2008, signed by President Bush on July 30, bank and other processors of merchant payment card transactions (credit and debit cards) will be required to report a merchant's annual gross payment card receipts to the Internal Revenue Service. Like any 700-page bill that is passed in a rush is loaded with fine print it will take a while to emerge. The new law also requires reporting on third-party network transactions, such as ones used by many online retailers. The merchant would get a copy of the form, which would be similar to the 1099 form companies use to report other payments to IRS.

The new law creates an exception from information reporting if the aggregate value of third party-party network transactions does not exceed $20,000 for the calendar year or the aggregate number of these transactions does not exceed 200. The exception for online sales was originally about $600, but companies that process online payments such as eBay's PayPal lobbied to raise it otherwise for example expensive items that sold on eBay might need to be reported to the IRS.

The law is designed to crack down on merchants who are under-reporting their revenues. The "paper trail" created by payment cards is currently unavailable to the IRS except on a case-by-case basis. The new law changes this. According to the Treasury Department, expanded information reporting will assist the IRS in increasing the compliance rate among merchants. It plans to compare the merchant's overall volume of payment card sales in relation to expenses claimed and cash transaction reported. The new reporting is estimated to raise more than $9.5 billion over 10 years.

Many Internet-based businesses will be impacted by these reporting rules. The new law requires the reporting party to provide the IRS with the merchant's Tax payer ID number. If the reporting party cannot provide this information, it would be required to withhold at 28 percent the payments to the merchants.

Montage Services, Inc. provides international and domestic tax consulting and advisory services primarily for corporations. To inquire about a particular tax issue or seek consulting services, contact Scott Wentz, Managing Director, at (415) 963-4016 or scott@montage-services.com.

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