Now that people are finally getting around to reading the massive 2,000+ page health care law, new taxes and compliance requirements are coming to light.
One revelation is the expansion of 1099 reporting requirements. Starting in 2012, businesses that make property purchases will have to issue 1099 forms to each vendor when they spend $600 or more with that vendor in a year. Property is a broad term that includes inventory purchases and supplies. In 2012, businesses will also have to start issuing 1099 forms to corporations (under current law businesses do not have to issue 1099 forms to corporations).
What is a 1099 Form?
A 1099 form is used to report certain types of income (rent, interest, dividends, miscellaneous income) to taxpayers. When you issue a 1099, you issue one copy to the party you paid money to, and you issue another copy to the IRS.
Example: ABC Restaurant buys food items from a local grocery and spends $10,000 during the year. ABC Restaurant will have to issue a 1099 to the local grocery reporting the total purchases of $10,000 during the year. Under current law, ABC Restaurant does not have to issue a 1099.
Example 2: Cheatum & Howe Law Firm buys a $700 printer from Office Depot. Cheatum & Howe Law Firm will have to issue a 1099 form to Office Depot reporting $700 of purchases.
Business will not have to issue 1099 forms to each vendor from whom they spend under $600 in a year. So, if Cheatum & Howe bought a $500 printer, they would not have to issue a 1099 form. If they bought 2 $500 printers from Office Depot during the year, they would have to issue a 1099 because total purchases during the year were over $600.
What does all this mean?
Well, businesses will have to ensure that they are tracking total payments to each business they deal with during the year. The address and EIN of each vendor will have to be kept on file. If there is a discrepancy between the dollar amount you report on a 1099 and your vendor’s records, get ready for an angry phone call.
Consider how many vendors you buy “property” from. Is it in the dozens or hundreds? Businesses are in for an administrative nightmare starting in 2012.
The IRS will compare expenses on business’ tax returns and then compare the amounts to 1099 forms issued.
Example: XYZ Corp shows office supplies expense of $3,000 on its tax return. The IRS reviews the 1099 forms issued by XYZ Corp and finds 1099 forms showing $1,000 of purchases reported to office supply companies. The IRS will want that $2,000 discrepancy explained.
What if you choose not to comply?
Failure to Issue 1099 Form: $50 for each 1099 not filed. The maximum penalty is $250,000.
Issuing an Incorrect 1099 Form: $50 for each incorrect 1099 form filed. The maximum penalty is $100,000.
Issuing a 1099 Form Late: $50 per late 1099 form. The maximum penalty is $100,000.
Fine Print: This posting contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.