There has been updated guidance on how and when tax filers must file and report Form 1099-K, Payment Card, and Third-Party Network Transactions in 2022 and 2023. According to the December IRS release, new income and transaction reporting requirements for so-called third-party settlement organizations (TPSOs) have been delayed for one year.

A TPSO, according to the IRS, facilitates payments to “participating payees” of the platform. This type of organization can be an online marketplace, an app, or payment card processors that are used to facilitate commerce transactions. It could be a digital marketplace that holds auctions or items for sale that functions as a nexus between those selling items and those buying the items. The TPSO also is tasked with reporting the total amount of transactions to the IRS and the payee or individual who receive remittance(s) from the TPSO in conjunction with selling an item on an auction website or similar platform, based on the new $600 tax calendar year threshold.

The previous reporting threshold (which is in effect for filing taxes for the 2022 calendar year) for TPSOs to be mandated to report to the IRS was:

1. More than 200 transactions occurring annually
2. More than $20,000 in sales annually

Originally set to take effect for the 2022 tax calendar year and mandated in the American Rescue Plan (ARP) of 2021, the new reporting threshold is triggered when more than $600 is earned in aggregate for a single tax year, without regard to the number of transactions per calendar year. It will take effect starting Jan. 1, 2023.

When it comes to calculating tax obligations, it’s important to notice how differences exist between gains and losses. For example, the first step is to determine whether there’s been a sale or a loss. If there’s a gain, it must be reported on Schedule D and Form 8949.

Depending on the outcome of the sale (a gain or loss), the IRS gives guidance accordingly. If it’s a gain, when it comes to accounting for fees paid in conjunction with the item’s listing, the selling expenses should be reported as “a downward adjustment” on either Form 8949 or Schedule D. Another consideration on sales of personal items is determining whether it’s a short- or long-term gain. Items sold that are held for more than one year are recognized as long-term. If the item sold has been held one year or less, the capital gain is recognized as short-term. But when it comes to losses, the IRS doesn’t permit filers’ deductions.

There is one important distinction between online sellers and “personal transactions” with the 1099-K Form. When items are sold for a profit, the intent of the 1099-K Form is to ensure income earned is reported to the IRS (and state revenue agency). However, if family members or friends are using such “third-party payment platforms” to split a purchase (for a meal, entertainment, ride-share, reimbursing a bill payment, etc.), such transactions are excluded because they qualify as “personal transactions” under IRS guidance.

With the guidance for smaller transactions evolving, which will undoubtedly impact more and more filers, individuals and those professionals helping them will undoubtedly have to keep an eye on future changes to 2023’s Tax Code.

According to the Harvard Business Review, mark-to-market accounting was what some attributed to the Great Financial Crisis of 2008. Economists such as Brian Wesbury and Steve Forbes attacked the so-called “fair value accounting” because it created further instability, leading to the eventual crash of the markets that prompted the Federal Reserve to implement the “Fed Put.” Understanding how mark-to-market asset valuation works is an essential piece of information for businesses to make the most of their accounting.

Mark-To-Market Accounting vs. Historical Cost Accounting

Mark-to-market, also known as fair value accounting, measures the current market value of an asset. Historical cost accounting values assets according to their original purchase price.

Mark-to-market is a method to assess the fair value of assets if they were sold at current market conditions with liabilities removed from the business’ obligations. It’s generally a fair assessment in times of normal market functions; but during times of volatility, it can provide a skewed assessment of value.

When businesses prepare their financial statements for a particular fiscal year and assess fair value for assets, the business would update its balance sheet with the value they would receive selling assets at current market conditions. This is opposed to what the business bought the assets for, or the asset’s historical or original purchase price.

This is especially true when it comes to trading in the markets, such as futures contracts. Futures contracts are marked to market on a daily basis at the end of the trading day. Depending on how the commodity traded intraday, short and long contract values are added to or subtracted from their starting basis, respectively.   

Traded Assets and Bad Debts

When it comes to “traded assets,” HBR gives an example of when an asset is to be marked to market every quarter. If a traded asset’s fair market value falls, it lowers the equity on its balance sheet and migrates via its income statement as a loss. For example, if a bank buys a bond for $2 million, then it falls to $1.8 million when the subsequent quarter closes (assuming the bond is still held), the business’ balance sheet will need to be adjusted (excluding any potential tax impacts). The balance sheet should reflect a $200,000 decrease in assets on the left side and a $200,000 decrease in equity. It will also be included on the bank’s income statement, reflecting a $200,000 pretax quarterly loss.

Institutions that provide loans will inevitably see a certain percentage go bad within a fiscal year. After accounting for the actual percentage of so-called uncollectable loans, they will have to re-evaluate such assets through the use of a contra account. This also can apply when companies offer pre-payment discounts to clients to encourage fast collection of accounts receivables (AR). Similarly, such assets will have to be marked down to lower values via a contra account.  

Conclusion

When it comes to valuing assets, businesses that understand the nuances of how accounting standards treat different types of assets will be better prepared to navigate their own tax and accounting needs.