November 18, 2010
Form 1099 Reporting Expansion
The 2010 Patient Protection and Affordable Care Act (Health Reform Act,) includes a provision requiring the expansion on the type of transactions that will necessitate information reporting requirements for businesses. After December 31, 2011, most businesses will be required to issue 1099s, for payments made in excess of $600, to all vendors including both corporations, as well as, payments made for the purchase of goods. Under current law, businesses or persons engaged in a trade or business are only required to issue 1099s for payments made for services rendered by non corporations. The previously established $600 threshold has not changed.
The revised 1099 reporting requirements were further expanded by the passage of The Small Business Jobs Act of 2010, signed into law by the President in September, 2010. Under this latest Act, the meaning of “persons engaged in a trade or business” will now include people receiving rental income from real estate. The Small Business Jobs Act requires qualified individuals receiving rental income from real property to file information returns with the IRS and to service providers reporting payments of $600 or more during the year for rental property expenses. For rental properties, the new information reporting requirement applies to payments made after December 31, 2010.
The purpose of the expansion of the reporting requirements is to try to close some of the tax-gap, largely made up of income that goes unreported by small businesses and contractors. A 2007 study conducted by the General Accountability Office estimated that establishing additional 1099 paper trails could provide up to $345 billion in new federal tax revenues, annually. Expanded information reporting is a popular revenue raiser and it is likely that reporting obligations, and their related compliance costs, will continue to increase for taxpayers. Congress relies on increased information reporting to provide a quick source of revenue and these policies worry many tax payers and practitioners.
Supporters of the new rules say these new requirements will simplify things for business owners, because they will no longer have to analyze every transaction and payee to determine the tax status of the entity and whether they paid them for services or goods. Starting in 2012, if they paid the vendor more than $600 during the year, the requirement is to send them a 1099. Business advocates are concerned about the strain these new filing requirements will place on small businesses that don’t have accounting departments. The National Small Business Association estimates that the average company will have to file at least ninety 1099 forms per year, up from fewer than twenty under current law. This also means businesses will have to obtain tax identification numbers and addresses for almost all suppliers.
The IRS is expected to issue guidance sometime during 2011 as the application of the law. The Health Reform Act provides that “The secretary may prescribe such regulations and other guidance as may be appropriate or necessary to carry out the purposes of this section, including rules to prevent duplicative reporting of transactions.” Some experts are anticipating that an exception may be made for recurring expenses such as those made to utility providers or rent payments to landlords.