Thursday, June 3, 2010


I have been thinking about the new IRS requirement, as per Section 9006 of the health care “reform” bill, for sending out 1099s to everyone and their brother, and about how it will affect me.

As CNNMoney’s article “Health Care Law's Massive, Hidden Tax Change” tells us (highlight is mine) - “beginning in 2012 all companies will have to issue 1099 tax forms not just to contract workers but to any individual or corporation from which they buy more than $600 in goods or services in a tax year”.

The article goes on to explain –

Right now, the IRS Form 1099 is used to document income for individual workers other than wages and salaries. Freelancers receive them each year from their clients, and businesses issue them to the independent contractors they hire.

But under the new rules, if a freelance designer buys a new iMac from the Apple Store, they'll have to send Apple a 1099. A laundromat that buys soap each week from a local distributor will have to send the supplier a 1099 at the end of the year tallying up their purchases

So first, corporations are no longer exempt from receiving 1099s. And second, 1099s must now be issued for the purchase of goods as well as services. The filing threshold, which has historically been more than $600, remains unchanged. So if payments to any vendor or contractor exceed $600 a Form 1099 must be issued.

I have no problem with having to issue corporations a Form 1099 for services provided. I am a corporation, so this would mean my business clients would need to issue me a Form 1099-MISC each year. I report all my income, so this would not increase my tax burden. I would just have to add Taxpro Services Corporation to the list of 1099s I must type for each business client along with W-2s on Christmas and New Years Eve. I can count my business clients on the fingers of one hand, so my workload would not increase materially because of this change.

The problem will arise if I must issue 1099s to Staples, Office Depot, and other vendors for my own business and for all my business clients. Here is where Congress, in its wisdom (or, as is more often the case, lack of wisdom), has once again overreacted to an issue rather than responding to a problem, something they are famous for doing.

One of my clients is a tavern. So I expect they will have to issue to each and every liquor supplier a Form 1099. On the way into work the bartender will regularly stop at a local Shop Rite and purchase food and other items for the bar. Does that mean that it must also issue a Form 1099 to Shop Rite?

In my case I personally record the business checking account activity, including individual check payments, for each of my business clients on a general ledger computer program. This program not only keeps track of payments by expense type, but also by individual vendor. So in January I can print-out a report of payments by vendor, making it easy for me to determine which ones will need to be issued 1099s.

But what of businesses who keep their own books, such as they are, and do so manually? This will certainly create more work for them and their accountants, bookkeepers and/or tax professionals.

But the actual issuing of 1099s is not the real problem. The CNNMoney article quotes Marianne Couch, a principal with the Cokala Tax Group in Michigan and former chair of a citizen advisory group to the IRS on small business and self-employed tax issues, who “thinks the bigger headache will be data collection: gathering names and taxpayer identification numbers for every payee and vendor that you do business with”.

Getting EINs from Staples, Office Depot, and, in the case of the tavern, regular liquor suppliers should not be a problem. But what of local independent vendors and contractors? I expect many will be reluctant to provide such information. So W-9s will need to be issued and back-up withholding will need to occur. This will cause much more “agita” for small business than the mere need to issue 1099s.

As a long-time tax professional I can tell you, and I expect most of my colleagues will agree, that many truly small business clients do not have any contact with us during the year, and we are only given a list of expenses by category at tax time for transfer to a Schedule C. So we will have to waste valuable time during the filing season to determine if any 1099s are required and track down the necessary information well after the fact.

Luckily these new requirements will not begin until tax year 2012. So when these clients come in to have their 2011 returns prepared we will have to tell them, and remind them again several times before the end of 2012, that they need to get EINs from all vendors and contractors to whom they will pay more than $600 during the year, and that they need to get the necessary information to us as early as possible in January of 2013.

While the new rules apply only to businesses – what of the owner of rental property? Is renting not a business? Will Schedule E filers, as well as Schedule C filers, need to get this information and issue 1099s also?

I hate to say this, but members of Congress are at the very least lazy and at most idiots. They more often then not don’t fully understand all, if any, of the implications of what they are passing. I doubt they actually read any of the bills they vote on. Either that or they have absolutely no regard for the additional burden their oft ridiculous laws puts on various classes of taxpayers.