By Bill Bischoff
Last year’s healthcare legislation included new Form 1099 rules for businesses. They will result in tons of additional paperwork, and smaller businesses with limited resources will be disproportionately affected. After a continuing outcry from the business community, the House is scheduled to vote on repealing the rules this week. But first, here’s a look at what’s wrong with the new 1099 rules.
Payments to Corporations
Currently, payments to corporations are generally exempt from the 1099 rules. Starting in 2012, however, if your business pays a corporation $600 or more in a calendar year, you generally must report the payments on a 1099. For example if you pay $10,000 to rent space from a corporation, you must issue a 1099. If you send an employee out of town and pay $1,500 to a hotel company, you must issue a 1099. While this requirement will result in millions of additional 1099s each year, nobody who understands how the IRS works believes it will improve tax compliance by encouraging scofflaw corporations to report more income. The IRS simply doesn’t have the capacity to match all those 1099s to income reported on corporate returns (too many other variables can affect a company’s income). Corporations that are cheating now are not going to stop because of the new 1099 rules.
Payments for Property
Currently, payments for property are exempt from the 1099 rules. Starting in 2012, however, if your business pays $600 or more in a calendar year to any payee for property, you must report the payments on a 1099. The term “property” means equipment, merchandise, raw materials, and just about anything else you can lay your hands on. For example, if your business buys an old pickup truck from an individual for $1,500, you must issue a 1099. If your business spends $1,000 at a store to buy food and beverages for a company party, you must issue a 1099. Once again, nobody that I’ve talked to believes this new rule will result in higher tax collections. The IRS doesn’t have the resources to do the matching here, either.
Payments of Gross Proceeds
Under another new rule that will take effect in 2012, payments by a business of $600 or more in “gross proceeds” to a payee in a calendar year must be reported on a 1099. Apparently, this rule is intended to force businesses to issue 1099s for payments to non-corporate payees such as restaurants, motels, gas stations, auto repair shops, and so forth. I don’t think any informed person believes this rule will improve tax compliance, but it will surely make life more difficult for businesses.
It Gets Worse
As part of the 1099 process, your business must obtain taxpayer ID numbers (TINs) from each payee that you issue a 1099. If you’re unable to get a TIN, you must withhold federal income taxes from payments to that payee and send the taxes to the government. By the same token, you’ll have to make sure all your customers have your TIN to avoid having taxes withheld from payments made to you.
The Last Word
Thankfully, businesses will not be required to issue 1099s for transactions paid with credit cards. Still, it’s easy to see why the business community is furious about the new rules and why repeal is likely. What’s harder to see is how Congress could have been dumb enough to enact them in the first place.
Readers, what do you think?