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1099 Changes Plague Small and Big Business Alike
-November, 2010

 

FSBU
Download a pdf of the
Fiducial Small Business Update newsletter.

Beginning in 2012, there is a little known change to 1099 reporting structure included as part of the health care reform law (Section 9006 of the Patient Protection and Affordable Care Act) that will have a big impact on businesses large and small. The change involves those pesky underreported payments of $600 or more. That may not be new information to you. “I’ve always reported my 1099 miscellaneous payments that exceed that amount,” right? Think again. The change included as part of the health care reform law now includes purchases from major chains like Staples and Office Depot for office equipment, computers, and virtually any other type of purchase.

Hold on to those receipts and get your keyboard fired up. Under the law, businesses will be required to send a 1099 to other businesses for nearly every type of purchase that exceeds the minimum $600 threshold. You can expect to receive 1099-misc forms from every organization where your annual purchases exceed the minimum amount. Why? The IRS says that it currently loses more than $300 billion each year in tax revenue on income that goes unreported. With this change, the expectation is to make nearly $17 billion over 10 years (2012 through 2019).

Under the existing law, businesses are required to use Form 1099 to report excess payments for rent, interest, dividends and non-employee services to all entities that are not corporations. Payments made to corporations are not required to be reported. The new law will require corporations to begin participating in this process. In order to properly file, the business will need to obtain a Taxpayer Information Number (TIN) from every vendor where payments exceeded the $600 minimum. So, if you’re traveling on business and stay at the Marriott for a 5-day conference, you’ll need to send the Marriott a 1099 for your expense account purchase and obtain the TIN for the Marriot in which you stayed. Buy a new iPad for work? You’ll have to send Apple a 1099 and locate a TIN from the store to document your purchase. The expectation is that retailers will include the TIN on the purchase receipt once the 2011 tax year begins.

Two key changes to how 1099s will be used:

  1. The law expands the 1099’s scope by using 1099s to track payments not only for services,
    but also for goods purchased.

  2. Requires that businesses and individuals issue 1099’s not just to individuals, but also changes that scope to include ‘any corporation.’ The only exception to this rule is payments made by nonprofit corporations under Code Section 501(a), which includes all
    501(c) organizations.

The burden of compliance is expected to be extraordinary for business owners and corporations alike. The Taxpayer Advocate Service’s most recent report estimates that this requirement will apply to 40 million businesses in the U.S. According to a recent survey of small businesses by the Pennsylvania-based SMC Business Councils, average businesses under the old law sent ten 1099 filings each year requiring about 30 minutes each to prepare. The new legislation is estimated to generate a minimum of 200 filings annually costing that same small business an estimated $6,000 to prepare their tax return.

Additionally, a separate piece of legislation involving 1099’s was passed during the previous administration’s tenure that involves PayPal, eBay, Amazon.com and credit and debit card business transactions. Buried in the Housing Assistance Tax Act signed by George W. Bush in July 2008, the IRS began laying the groundwork to catch millions of those ‘tax gap’ dollars, i.e. the billions lost between what individuals and businesses owe and what they actually pay, in the form of businesses that operate on eBay, Amazon.com and who use PayPal accounts to process payments. Credit card processors will also be required to submit an annual form documenting the year’s transactions. Starting in 2011 as part of 2008 stimulus legislation, PayPal will be required to report annual transactions via online or credit card payments when they exceed 200 transactions or $20,000 (gross) before they report. Gross amount is defined by the IRS as the “total dollar amount of aggregate reportable payment transactions for each participating payee without regard to any adjustments for credits, cash equivalents, discount amounts, fees, refunded amounts or any other amounts.” When that volume threshold is exceeded, sellers will be required to provide TIN (either social security number (SSN) or Employer Identification Number (EIN)) to payment processors like PayPal and then report that amount to the IRS on Form 1099-k. The 1099-k is currently in draft form and will be introduced for the 2011 tax year. To learn more, you can read PayPal’s revised User Agreement or talk with your accountant.

How can your small business prepare to handle
this paperwork nightmare?

  1. Expand the information that your business requires of its customers to include payee names, amounts paid, and SSN/EIN/TIN for each transaction.

  2. Modify your computer and accounting systems to accommodate the increased information for easier use.

  3. Talk with your bookkeeper or accounting professional and take steps now to add the increased
    reporting to your financial infrastructure.

The IRS opened public comment on this issue on July 2, 2010 through September 29, 2010 and is expected to issue its own guidance on the topic soon. It will post clarifications and/or any changes to the law on its web site. There is also new legislation in the House and Senate intended to repeal these requirements, but it does not appear likely that revocation will occur in the near term.

Don’t become caught in the 1099 reporting web by noncompliance or erroneous submissions. Talk with a Fiducial Advisor by calling 866-FIDUCIAL or visit the web site at www.Fiducial.com to learn more.