By: Jim Schneidmiller, Tax Partner
and Jerad Daley as contributing author
In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act. Headlines proclaimed the Act would result in health care insurance coverage for an additional 30 million Americans. The Act also includes higher payroll taxes, tighter consumer regulations for insurers and employer-sponsored plans , and the creation of public health insurance exchanges. However, the news media did not heavily report on a provision that radically changes the way businesses account for vendor payments.
Beginning January 1, 2012, Form 1099 reporting will be mandatory for payments to a vendor in excess of $600 annually, and reporting is required irrespective of whether the vendor is a corporate or noncorporate entity. A vendor is described as a trade or business that performs services or supplies goods to another business in exchange for compensation. For example, a manufacturing company that purchases over $600 of raw materials from a supplier will be required to report the purchase of materials to both the IRS and the supplier on a Form 1099.
This new requirement dramatically increases in the amount of information businesses are required to report to the IRS. There is no doubt that this is going to be an administrative nightmare for our clients and the business community. Many businesses which have historically filed only a few Forms 1099 will now be filing scores or hundreds. Taxpayer identification numbers (TINs) and mailing address information will have to be obtained for all existing and new vendors. The recordkeeping and compliance ramifications to businesses are huge and costly.
Previously, businesses used Form 1099 to report rents, royalties, interest, dividends, non-employee compensation, and other miscellaneous income items paid to noncorporate entities to the IRS. The primary purpose of the new reporting requirement is to reduce the “federal tax gap” – the difference between what is owed in taxes and what has been paid. The IRS says the tax gap is primarily fueled by three factors: underreporting of revenue, over-reporting of expenses, and underpayment of taxes or non-filing of returns.
The IRS believes that this additional reporting requirement will reduce the tax gap. Under the new law, the majority of business revenue is reported to the IRS by a second source – the business that originally paid for services or merchandise. The second reporting source makes it more difficult for businesses to understate revenue on their tax returns. Additionally, businesses are less likely to overstate their expenses because vendors will have a vested interest in seeing that the Forms 1099 they receive do not contain inflated figures.
Considering that the effective date of the new requirement is more than one year away, relief may be on the horizon via providing exemptions for small businesses or an exclusion from reporting for certain costs. The IRS already announced that payments made via credit cards will be exempted from reporting because beginning in 2011 the credit card companies are required to file similar information with respect to payments they process. However, businesses should not count on all provisions being eliminated – they have already survived one attempted repeal vote in Congress. Accordingly, businesses should begin planning now to implement the new reporting requirements. The expert tax team at Peterson Sullivan can assist in this process, and we would welcome the opportunity to talk with anyone facing new Form 1099 reporting requirements.
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To learn more about how Peterson Sullivan can assist with tax planning and other accounting services, please contact marketing@pscpa.com or call 206-382-7777.
