SNAP Accounting & Taxes
Managing tokens requires some additional bookkeeping and documentation. A best practice used by many markets around the country is to set up a separate bank account for the token program. This greatly simplifies tracking activity, reconciling balances and reporting. You should know where all tokens are at all times. Your tracking system should accurately track:
• How many tokens you have on hand at any given time;
• How many you distribute per market day;
• How many tokens are returned per market day; and
• How many tokens are outstanding or unredeemed at any given time.
Because SNAP is a taxpayer-funded federal nutrition assistance program, FNS requires a detailed audit trail so as to avoid any potential or perceived fraud. As a “new currency” in your market, tokens should be treated just like cash. This means losing tokens is the same as losing cash. Be sure tokens are stored in a secure location and provided only to SNAP customers when their transaction has been approved.
For Sample Token Tracking and Accounting Templates, Please Visit:
The Farmers Market Coalition’s Token and Incentive Accounting Templates
North Carolina’s Carrboro Farmers Market Electronic Transaction Workbook
Food From Farms’ Direct Alternative Currency Tracking- Excel Worksheet
On August 16, 2010, the IRS issued final regulations (Treasury Decision 9496) related to Internal Revenue Code Section 6050W, which generally requires information reporting on payment card transactions occurring after December 31, 2010. This rule requires all electronic card processors to issue 1099K’s to all merchants accepting electronic payments. This includes all credit, debit, and EBT payments. Unfortunately, IRS did not consider the implications this rule would have on non-traditional retailers such as farmers markets operating a scrip system. Notification was made to USDA Food and Nutrition Service after the comment period to this new rule was closed. Farmers Market Coalition, working with other allies, urged the IRS to clarify how this rule would be imposed on markets operating a scrip system. The information that follows is based on the clarifications provided by the IRS on IRC 6050W as it pertains to farmers markets.
Farmers Market Reporting and Conditions for Exemption
As the rule is written, all merchants of electronic payment processors will receive a 1099-K beginning in 2012, reflecting payments made in the prior tax year, informing both the merchant and the IRS of the sum total of all electronic payments (including EBT, debit, and/or credit). A third party network is any arrangement which involves the establishment of accounts with a central organization by a substantial number of persons (50 or more, according to the legislative history) who provide goods or services, who are unrelated to the organization, and who have agreed to settle transactions through the arrangement. A farmers market operating a token or scrip system is considered a third party network, where customers use electronic payment to receive approved scrip from a central payor (the farmers market), which is then exchanged for goods with individual market stall-holders, who are reimbursed by the central payor. Third party network transactions are reportable from the central payor (market) to the payee (farmer) only if they meet the definition of a third party network and if the number and amount of the transactions exceeds certain thresholds.
Thus, small farmers markets (those with 50 or fewer stall merchants) are not subject to this level of reporting because they are not third party networks. Larger farmers markets that constitute third party networks are subject to 6050W only to the extent that payments to a particular stall merchant involve more than 200 transactions and exceed $20,000 per calendar year (Note: “transactions” refers to the exchange of scrip between farmer and farmers market, not between customer and farmer). In these cases, farmers market managers would collect Taxpayer ID numbers or Social Security Numbers for each of their vendors accepting tokens that originated from electronic transactions, and prepare and issue 1099-K’s to each of these vendors that reflected their month-by-month reimbursement transactions. All transactions are reportable, meaning 1099-K forms to vendors are required if the annual total of scrip reimbursements for a given vendor exceeds $20,000, and the aggregate number of reimbursements exceeds 200 over the course of the calendar year. The total transactions include all debit, credit, and EBT transactions.
Here are some tests to determine if you are exempt under this rule clarification:
- Do you have 50 or more farmers and vendors accepting and redeeming tokens?
- If yes, continue to number 2
- If no, then you are exempt from issuing 1099-Ks to your farmers and vendors.
- Do you have any farmers or vendors to whom you make reimbursements 200 or more times during the year AND the total reimbursement exceeds $20,000?
• If yes, then you must issue a 1099-K only to those particular vendors.
• If no, then you are exempt.
Note that all vendors are each individually responsible for reporting to the IRS all income derived from market sales, including cash, check, token, and electronic sales. Appropriate record-keeping will demonstrate your qualification for exemption to the IRS should any questions arise.
Impact on Farmers Market Income
Markets that are operating as a nonprofit, or under the umbrella of a nonprofit, will be able to show the income reported on a 1099-K as pass through income by showing the income and the expense (reimbursements) on their 990. The unredeemed income will be held as a liability on your financial statement.
Markets that are operating EBT under a manager’s personal Social Security Number, however, will need to file a Schedule C-EZ. This form is for Net Profit from Business. Your “income” as reported on the 1099-K from the service provider (for example, FIS Government Solutions), will be recorded here. The income can be offset by noting the expenses deducted out of this income: payments to farmers, operating expenses (e.g. mileage to and from the market, cost of terminal paper, receipt book, etc.). This income can be brought to a negligible sum or zero by this method. The income reported to IRS, then, would not impact your personal income tax.
Questions? Persons trying to determine whether they have a reporting obligation, who has the ultimate obligation to report, and how, are advised to contact IRS at 1-800-829-1040. A set of Frequently Asked Questions about IRC 6050W is available the IRS web site at https://www.irs.gov/payments/general-faqs-on-new-payment-card-reporting-requirements
For more information, watch FMC’s webinar 6050W and Farmers Markets Electronic Payment Reporting Requirements.
Accounting for Unredeemed SNAP Tokens
When a SNAP customer purchases SNAP tokens from the market, the value of the tokens becomes an accounting “liability.” That is, the market must treat these funds as money that the market owes to third parties, as token recipients are entitled to either:
- Spend those tokens at vendors selling SNAP-eligible food items (in which case the market must be prepared to reimburse the vendors); or
- Seek and receive a refund from the market for unspent token amounts.
The market should respond accordingly by keeping sufficient financial reserves to cover these anticipated redemptions and refunds.
If, based on their experience, markets reasonably expect that a given percentage of outstanding tokens will never be redeemed (or submitted for a refund) and wish to reduce the amount of financial reserves they hold for these potential redemptions/refunds, the market may make an annual “allowance” for these “doubtful tokens,” count their value as revenue for tax purposes, and reduce their reserve for SNAP redemption and refund accordingly. (Ideally, markets should consult with an accountant before taking such actions.)
The USDA Food and Nutrition Service stated in notes from a February 2018 SNAP at Farmers Market Workgroup call (link to notes) that: “SNAP-authorized markets and farmers cannot put expiration dates on their tokens, because SNAP customers must be able to redeem tokens purchased with SNAP benefits at any time that the market is open for business. The market may reallocate unredeemed token funds for administrative expenses at the market, with the understanding that they must still honor that token if it is redeemed in the future.” Questions for FNS regarding this policy can be directed to firstname.lastname@example.org.
EBT Vendor Policies and Training
Discussing opportunities and challenges with key people up front can help reduce the reluctance that tends to accompany change and make sure everyone understands the impacts of this change. Many markets have found that written agreements are useful and may help avoid misunderstandings and miscommunication.
Letting vendors know “why” the market is going to offer EBT and/or debit/credit is very helpful. One of the reasons may be that the market is adopting this program to increase vendor sales. Remind vendors that the market is paying for and shouldering most of the work in managing the EBT and debit/credit program. If you plan to charge vendors for this service, make sure to explain this to them early in the process. Regardless, some vendors may be hesitant or unwilling to participate. Other markets have found that these vendors will likely change their minds once they realize they are losing sales by not accepting the EBT or debit/credit tokens.
New technologies such as the Square card reader for smartphones are making it easier and cheaper for vendors to accept debit/credit cards directly from shoppers. This may make sense for vendors with higher priced items, such as meats, fish, dairy or wine. Should vendors be encouraged to accept credit and/or debit cards directly or should the market create its own token program to accept debit/credit cards? In reality, both options are commonly available at markets. This creates more options for shoppers, vendors, and ultimately the market itself. As new technologies emerge, it’s important to evaluate which upgrades will add value to your market, and which ones will detract from your market’s model — from a financial or an operations point of view. You’ll want to make sure you’re receiving a return on your investment — whether the technology actually improves your day-to-day will help you evaluate the benefit in relation to the cost.
Learn more about the legal requirements of SNAP retailers in the Farmers Market Legal Toolkit.