When you start a business, you must decide

Starting and Running a Small Business:

Cash & Credit Cards

This chapter considers the three most common ways that businesses get paid for the goods and services they sell: cash, credit cards and checks.

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A. Cash

Cash includes not only currency but also equivalents that are as good as cash—certified checks, cashier’s checks, traveler’s checks and (less common these days) money orders. Personal and business checks are quite another matter.

If you have very large cash transactions, you may have to report them to the IRS. The reporting requirements are intended primarily to deter money-laundering schemes by customers (often drug dealers) who want to conceal income.

If you receive more than $10,000 in cash in one transaction or two or more related transactions, traveler’s checks or money orders (but not certified, cashier’s or business or personal checks), you’re required to provide information about the transaction to the IRS—including the name, address and Social Security number of the buyer. In addition, if you’re a retail merchant, you must report:

• cash transactions in which you receive more than $10,000 in installment payments in one year

• transactions of more than $10,000 in which part of the payment is in cash, traveler’s checks or money orders; and

• any “suspicious transaction,” no matter what the amount.

In calculating whether a transaction or related transactions involve more than $10,000 in cash, you must include not only cash, but also each cashier’s check, traveler’s check, bank draft or money order that’s made out for $10,000 or less.

Example 1: Gloria buys a boat from Todd, a boat dealer, for $16,500. She pays Todd with a $16,500 cashier’s check payable to him. The cashier’s check isn’t treated as cash because the face amount is more than $10,000. Todd doesn’t have to report this sale to the IRS as a cash transaction.

Example 2: Donald buys gold coins from Maryanne, a coin dealer, for $13,200. Donald pays Maryanne $6,200 in $100 bills and a $7,000 cashier’s check that he’s purchased. Because the cashier’s check is less than $10,000 it’s treated as cash, so Maryanne must report this to the IRS as a cash transaction.

Use IRS Form 8300 (Report of Cash Payments Over $10,000 Received in a Trade or Business). You must also provide a copy of the completed form to the customer.

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B. Credit Cards

Depending on the business you’re in, your customers or clients may want to pay with plastic—the familiar Visa, MasterCard, Discover, American Express and other cards. Technically, there’s a distinction between “credit cards” (such as Visa or MasterCard) and “travel and entertainment cards” (such as American Express and Diners Club) also called “charge cards.” Credit cards are administered through banks; charge cards are usually administered through the issuing company. For most practical purposes, the same legal concepts apply, so I’ll simply use “credit card” to cover both types.

In deciding which credit cards to recognize, take into account the preferences of your customers and clients, as well as the size of the discount exacted by the credit card issuer and how quickly you get paid.

When a customer charges goods or services using a bank-administered credit card, the bank credits your account with the amount of the sale less a discount—usually 3% to 5%—which is the bank’s fee for handling the transaction and accepting the risk that the customer doesn’t pay. In addition, the bank may charge you a start-up fee and an annual rental fee for the imprinting machine you use to record credit card information on sales slips.

If you’re in a retail or other business where customers or clients expect to pay on credit, credit cards are often more cost-effective than directly extending credit. In general, if you follow the bank’s rules—such as checking the credit card to make sure it hasn’t expired and getting approval for all or at least larger transactions—the credit card issuer (not you) absorbs the loss if the customer doesn’t pay up. Some of the newer electronic systems used by credit card issuers do most or all of the checking for you and get the money into your bank account almost immediately.

But whether you check credit cards the old-fashioned phone-in way or rely on the new systems, there are still a few exceptions to this general rule that if you follow the bank’s procedures, you’re sure to get your money. For example, if the goods are defective and the customer refuses to pay the bank, you may have to bear the loss. This will be spelled out in your contract with the bank. Read it carefully.

About a dozen states restrict your ability to record personal identification information about a credit card holder. The laws on this subject differ from state to state, but the California statute provides a good illustration of the kinds of restrictions that may apply to you. In California, in most circumstances you can’t require the cardholder to give you personal identification information such as an address or phone number. There are, however, a few exceptions. You can require the cardholder to provide this information if:

• The bank or other agency that issued the credit card requires it to complete the transaction; or

• You need the information for a special purpose related to the transaction, for example, shipping, delivery, servicing or installation of the merchandise or for special orders.

There can be hefty penalties for violating these statutes, so learn the rules in your state and make sure that your employees know them.

But even if your state does permit you to record this information, ask yourself if you really need it. After all, if the customer doesn’t pay the bill, it’s a problem for the bank that issued the credit card, not for you. And because some customers regard the request for personal information as an invasion of their privacy, doing so may be poor marketing. If your main reason to gather this information is to build a mailing list, it’s better simply to ask your customers if they’d like to be added to your list.

Excerpted from the “Legal Guide for Starting and Running a Small Business”, by Fred S. Steingold