Wednesday, May 12, 2010

Now I know why there 50 in the package...

I have always done my own taxes (with mucho help from TurboTax) but one thing that griped me was the only way to get 1099's for my landowners (other than remember to order them from the IRS, of course) was to buy them in Staples, etc. The minimum choice was fifty for about $25 or so - a real ripoff, IMHO.

The good news is I won't be wasting as many in the future.  The BAD NEWS is, as a small business, I now will soon have to report payments of over $600 not just to service providers, but dang near everybody.  You heard me - my JD dealer, Lowes, corporations, you name it.
I read on FatWallet that a hidden gem in the new health care reform law will require a business to issue a 1099 Form to all vendors starting in 2012 if the business purchases $600 or more in goods or services in a year from that vendor.
Currently a business is only required to issue 1099s for payments for services, not goods, purchased from individual persons, not corporations, if the total payments to that person exceed $600 a year.
I find this quite unbelievable. Small business owners buying from Costco will have to send a 1099 to Costco at the end of the year. Because chain stores are often owned by different entities under a franchise agreement, a business buying from one store versus another under the same chain will have to track the corporate entities behind each one separately. What a nightmare.
Because it’s so unbelievable, I had to look up the laws myself. It’s amazing but true. Section 9006 of Patient Protection and Affordable Care Act says (the key phrases are in bold):
(a) IN GENERAL.—Section 6041 of the Internal Revenue Code of 1986 is amended by adding at the end the following new subsections:
    "(h) APPLICATION TO CORPORATIONS.—Notwithstanding any regulation prescribed by the Secretary before the date of the enactment of this subsection, for purposes of this section the term ‘person’ includes any corporation that is not an organization exempt from tax under section 501(a).

… …
(b) PAYMENTS FOR PROPERTY AND OTHER GROSS PROCEEDS.— Subsection (a) of section 6041 of the Internal Revenue Code of 1986 is amended—
    (1) by inserting "amounts in consideration for property," after "wages,",
    (2) by inserting "gross proceeds," after "emoluments, or other", and
    (3) by inserting "gross proceeds," after "setting forth the amount of such".
(c) EFFECTIVE DATE.—The amendments made by this section shall apply to payments made after December 31, 2011.
After all the insertions, the amended Section 6041(a) of the Internal Revenue Code becomes (the inserted words are in bold):
(a) Payments of $600 or more
All persons engaged in a trade or business and making payment in the course of such trade or business to another person, of rent, salaries, wages, amounts in consideration for property, premiums, annuities, compensations, remunerations, emoluments, or other gross proceeds, fixed or determinable gains, profits, and income (other than payments to which section 6042(a)(1), 6044(a)(1), 6047(e), 6049(a), or 6050N(a) applies, and other than payments with respect to which a statement is required under the authority of section 6042(a)(2), 6044(a)(2), or 6045), of $600 or more in any taxable year, or, in the case of such payments made by the United States, the officers or employees of the United States having information as to such payments and required to make returns in regard thereto by the regulations hereinafter provided for, shall render a true and accurate return to the Secretary, under such regulations and in such form and manner and to such extent as may be prescribed by the Secretary, setting forth the amount of such gross proceeds, gains, profits, and income, and the name and address of the recipient of such payment. [More - with especially helpful Q & A in the comments]

This gem was buried in the Affordable Care Act, so be sure to add that to your list of grievances with health care reform. Only it is exactly the same concept the Bush administration tried to get passed to close the "federal tax gap.

For many years I have been hearing about the “federal tax gap”.  The tax gap is what the federal government believes should be paid in taxes versus what is actually paid in taxes.  The tax gap is estimated to be approximately $350 billion annually.  The tax gap comes primarily from three areas of noncompliance with the tax law: under reporting of taxable income (by under reporting revenue or over reporting expenses), underpayment of taxes, or non-filing of returns.  A significant majority of the tax gap is created by those that under report their taxable income. 

The federal government is running a $1.6 trillion deficit in the current fiscal year.  Additionally, the new healthcare entitlement program will create huge cash drains on the federal budget in future years.  To help close the tax gap and fund this deficit spending, the federal government has expanded informational reporting requirements of businesses. Under current tax law, if a business makes payments in excess of $600 to a person or a business over the course of a year, it must file Form 1099 to report those payments. One copy of the form is sent to the IRS, and another copy is sent to the person to whom you made the payments.  Payments made to a corporation and payments made in exchange for merchandise are not required to be reported on a 1099. [More]
This could be good news for credit card companies and accountants, of course.  Card companies could do this automatically for a modest fee, and accountants could nag you even more about your record-keeping.  Farmers/spouses with accounting backgrounds might have more opportunity for a second income, especially if they get out ahead of this in their community.

It is just one consequence of the screams for eliminating waste and fraud in the federal budget.  This is one tactic stop some well-documented fraud.  Unless objectors have a better way to cut down the "tax gap" we'll have to adjust.  I agree with the aim, but many probably had hoped a "W & F" fairy could just make it go away if we closed our eyes and wished really hard. This seems like a logical, albeit onerous answer to the concerns anyway.

But it also, I believe is another load for small business and a powerful incentive to merge into larger farms that can dedicate personnel to bookkeeping/accounting full-time - rather that when it rains. I don't see much hope of letting small businesses skate on this one.  We probably have our fair share of under-reporting (heh).  It will also be a selling point and price booster for accounting/tax software, I would guess.

And of course there will be merely oodles of pages in farm mags about this, as well.

Update:  I have been pondering the implications of this regulation since I posted. I gotta believe this will be non-paper reporting - online/electronic submission of information to the IRS. There's just no way in Hades that many 1099's are going to be mailed to Kansas City, etc., dontcha think?


Anonymous said...

When is it going to stop? For an individual the farm program stuff is an inconvenience, but for a crop sharing farm manager it is a major task. Now, 1099's for everything and everyone. Unbeleivable!!!! A national sales tax would be palitable now in leiu of all this.

Anonymous said...

When is it going to stop? For an individual the farm program stuff is an inconvenience, but for a crop sharing farm manager it is a major task. Now, 1099's for everything and everyone. Unbeleivable!!!! A national sales tax would be palitable now in leiu of all this.

Anonymous said...

Ouch! Now I REALLY wish I had finished out that accounting degree. Not that I have time to do anyone else's, or maybe not even my own soon.

Anonymous said...

To me this just means that the folks I do business with will either be one of the many under $600 per year, or one of the few well over $600 per year. Looks like consolidation anyway you slice it.