In the big tax fights of this year, the coming changes to who must get 1099 forms would hardly seem to rate. But for the vast majority of small businesses, these new rules will hit far harder than the estate tax, despite political posturing on that front.
The new rules on 1099 forms, which were attached to the health care bill and are set to go into effect in 2012, call for all businesses, no matter how small, to file 1099 forms for goods as well as services, if those goods cost over $600 (the current threshold). It also gets rid of the distinction between corporations, which previously did not need to receive 1099s, and unincorporated entities, which did.
As someone who is considered a small business for tax purposes (as are all sole proprietors, consultants and self-employed people), I can’t help but think what this might mean for me. If I buy a new laptop, I’d better get the taxpayer ID number for Apple or Lenovo (depending on if I go Mac or not) and send that form off to wherever their tax department is located. And if I think I might spend more than $600 on pens, notepads, paper and the like at Staples over the course of the year, well, I’d better get their taxpayer ID number, too, and send them a form.
The 1099 form isn’t so bad if you’ve got the data, but the recordkeeping quagmire seems pretty clear. Will businesses that occasionally offer their employees pizza in a conference room need to get the local pizza place’s taxpayer identification number, then track the cost of all those pies to see if they amount to $600? Will truckers be required to send 1099s to the service stations where they fuel up? What about a company’s payments to the electric company to keep the lights on in the office? “It is a tremendous new administrative burden, and it is so senseless,” says Steve Henley, a national tax practice leader at CBIZ MHM, an accounting and financial consultancy.
The theory, of course, is simple: All that paperwork should help close the “tax gap,” the chasm between what Americans owe in taxes and what they actually pay. And this provision is expected to bring in $17 billion over ten years, which would help offset the costs of the health care bill.
No surprise, the National Federation of Independent Business and a slew of other small-business groups have called for the provision’s repeal. During the debate over the recently enacted small-business lending bill, efforts to get the 1099 reporting requirements repealed failed, though it seems likely that they’ll be modified in some way before 2012.
Already, Internal Revenue Service Commissioner Douglas Shulman has said that the agency will exempt transactions done with credit or debit cards. (A separate law that goes into effect in 2011 requires card processors to file reports to the IRS.)
If you’re worried about the impact of these changes, you’ve got some time to prepare. If you’re running a start-up or one-person operation that doesn’t already have a separate business credit card, get one. Then if the rule sticks around, check to be sure that you have the legal name, address and taxpayer identification number of each of your vendors on file. If not, you’ll want to take some time next year to send Form W-9s out to all of them—including that local pizza place!
In the tug-of-war between the need for tax compliance and the recordkeeping difficulties of small businesses, what do you think is fair? And if you’re among those who will be affected by this provision, how will this change the way that you run your business?