This week, the internet is abuzz about a provision included in The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act that expands reporting requirements related to forms 1099. As per usual, there’s some good information out there and some bad… Let’s see if we can’t sift through it.
The best place to start when you’re trying to make some sense out of changes to the tax laws – or any laws for that matter – is the actual source. In other words, take a peek at the law. A good place to find laws that are either pending or on the books is the THOMAS web site at thomas.gov, maintained by the Library of Congress “in the spirit of Thomas Jefferson.” You can find a bunch of information on the site including the sponsors of a particular bill, actions related to the bill, the status of the bill and, perhaps most importantly, the text.
So here’s the specific text of the health care bill that has everyone aflutter:
SEC. 9006. EXPANSION OF INFORMATION REPORTING REQUIREMENTS.
(a) INGENERAL.—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).
(i) REGULATIONS.—The Secretary may prescribe such regulations and other guidance as may be appropriate or necessary to carry out the purposes of this section, including rules to prevent duplicative reporting of transactions.’’.
(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.
I know, it sounds a bit like gibberish. What it does is modify a section of the Tax Code – that section is 6041, Information at source. You can find the whole text of that section here.
It’s important to read both sections for context. If you don’t, you’re liable to believe statements made on *other* web sites that imply that forms 1099 (which is the form used to report much of the information referred to in section 6041) are now required for every single transaction ever.
What you get when you mash the two sections together is this, more or less:
All persons engaged in a trade or business and making payment in the course of such trade or business to another person (including corporations otherwise not exempt), 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 … setting forth the amount of such gross proceeds, gains, profits, and income, and the name and address of the recipient of such payment.
That’s my own little mash-up of the law. I suspect it’s pretty close to what the revised section 6041 will look like.
And here’s what it means now:
1, Previously, forms 1099 were issued only to individuals and partnerships, not to corporations. That has changed. Corporations are now included in the potential pool of form 1099 recipients.
2, Previously, forms 1099 were issued only for rents, services and financial transactions. That has also changed. The sales of tangible goods are also potentially reportable.
What stays the same:
1, The $600 reporting threshold.
Since I’m a pretty Pollyanna type of girl, I’ll point out the positives first… The current reporting requirements stink. They constantly confuse taxpayers. A huge reason for the confusion: who the heck knows whether a vendor or service provider is a corporation? When entity choices were simple (sole proprietor, partnership, corporation), it was much easier. But now there are more choices (LLP, LLC, s corporation, LLLP, PC, etc.) made even more confusing by the notion that an entity can have a completely different tax classification (an LLC can be taxed as a partnership, a c corporation or an s corporation). Like many other taxpayers, I don’t know whether my plumber for my business is an individual or a corporation – I just hired him off of Angie’s List. So I don’t know whether to report those payments or not – and neither do most taxpayers… Every tax season, I get a slew of “do I have to issue a 1099 to (fill in the blank)?” type questions because the current law is just so confusing.
So what I think Congress was trying to do was make things easier.
But Congress being Congress, they didn’t. As a practical matter, expanding the definition of person to include corporation means more reporting requirements. And for small businesses, in particular, that can be fairly burdensome.
What Congress also did is expand the definition of what’s reportable to include sales of goods. While the $600 threshold remains, the inclusion of goods will definitely up the quantity of required paperwork.
Again, I think Congress was trying to do a good thing here. I think they were trying to make it more difficult for businesses who sell goods online, etc., to hide income. It’s also intended to cut down on fraudulent deductions – if you report that your business spent money on window cleaning services to Clear, Inc. – and you have to issue Clear, Inc. a form 1099 for that amount – you’re more likely to report it accurately. Cause you’re not going to tell Clear, Inc. that you spent $1,000 when you actually spent $500. So the result is more accurate reporting. That’s good, right? It’s all about closing the tax gap and trying to recover some of that $300 billion in unreported income each year.
But again, Congress just made it more difficult for taxpayers. The expanded reporting requirement means that not only must businesses (not individual taxpayers) keep excellent records of payments, they must keep addresses and TIN numbers on hand for all of their vendors. That’s a bit of a nightmare in the making.
But all of that said, I don’t think it’s going to be quite as nightmarish as some in the blogosphere would have you believe. There is an important phrase in the new law that’s likely to ease the potential reporting chaos:
The Secretary may prescribe such regulations and other guidance as may be appropriate or necessary to carry out the purposes of this section, including rules to prevent duplicative reporting of transactions.
In other words, the IRS has some leeway here. And let me give you a heads up: the IRS doesn’t want this to be a reporting nightmare anymore than businesses do. I suspect we’ll get some guidance – and some relief – once the IRS issues Regs on the matter. If I had to guess, I would think that there will be some sort of exception for large national retailers or regular/repeat transactions – meaning that you won’t have to report your monthly shopping sprees at Staples via a form 1099.
If any of this matters to you (and if you’re a business person, it should), plan on following this discussion pretty closely. The IRS will hold public hearings on any proposed Regs and give you, as a taxpayer, the right to put in your two cents. They usually also accept public comment via US mail and email. Take advantage of the opportunity to make your voice heard.
Since the new law is effective January 1, 2012, you can likely count on seeing those proposed Regs and public hearings in 2011.
Of course, I’d love to hear your comments on this now… Chime in below!
(Hat tip to readers Jeff Day and Mary A.)