Whether you love Health Care Reform or hate ObamaCare, the bill contained a provision that will have a substantial impact on small businesses and startups. With little discussion the authors slipped in two significant changes to how 1099s have been used historically.
- First, 1099s will have to be issued for goods as well as services. In the past, you did not have to issue a 1099 for a purchase of goods such as office supplies, materials, or equipment.
- Second, 1099s will have to be issued to corporations, partnerships, LLCs – basically everyone you purchase from. In the past, 1099s were used to report payments to individuals and certain partnerships.
Combined, this means that small businesses will now be sending out literally millions of 1099 forms and will be responsible for keeping track of every one of these throughout the tax year. Beginning in 2012, businesses will be required to issue 1099 tax forms not just to freelancers and contract employees, but to ANY individual or corporation from which a business buys more than $600 in goods or services. Some examples:
- Homebuilders will have to issue a 1099 to the building material supplier for the materials used in the home.
- Have the airconditioning repaired at the office and you have to send a 1099 to the incorporated vendor.
- Purchase raw materials for manufacturing from a corporation and you have to send a 1099.
This means that in addition to the 1099s that you already prepare, you will also be preparing a flood of these for your office supply provider, office cleaner, caterer, accountant, computer hardware supplier, office furniture vendor, and on and on and on. The bill will drastically alter tax reporting by highlighting payments that have typically gone unreported – the idea is to increase government revenues by helping the IRS to account for millions of these payments. The IRS has stated it may use its regulatory authority to allow credit card purchases to be exempt from these rules; however, the recordkeeping may get even harder if this is implemented.
The next pain of this reform is that you will also receive a flood of 1099s coming to you. With the IRS efile mandate, you will have to enter all of these 1099s into your tax return in order for them to be matched by the IRS. Count on more time to prepare your return and more inquiry letters from the IRS questioning the matching discrepancies.
Of course, there is a silver lining in this cloud for the accounting profession. The days of keeping your books on a spreadsheet (or paper sack) will fast be disappearing. In order to comply with these rules, all businesses will need some sort of accounting system with the ability to track payment amounts, payment types, 1099 status, and EIN numbers. You will also need someone to oversee the accounting to make sure it is up to date and accurate. The cost of noncompliance currently starts at $50 per 1099 that should have been issued and increases depending on the size of the business and the delay in delivering the form. You will need to start planning for the implementation of your required information systems in 2011 to be ready to track payments in 2012 when the law goes into effect.
Small businesses and lobbyists have started to push back hard against this change, realizing the profound impact it will have on their operations and accounting procedures. And the Congress is listening; two bills have been introduced which would repeal this provision and if passed, small business will be spared another regulatory hurtle which could threaten to drown us all under a new flood of paperwork. We are not likely to see any movement on this issue until the new Congress is in session.
Davis & Langford, Certified Public Accountants, have experienced Quickbooks Pro Advisors on staff to asisst in implementing accounting procedures to make the transition as painless as possible. We can be reached at www.DavisLangford.com.
