By Erin Baehr,
Do you pay tax on all of your income and deduct only those expenses you are entitled to? If you do, the IRS wants to level the playing field for you. Each year, the federal tax gap, or the amount of taxes due versus what is collected, runs about $350 billion. The IRS has stepped up enforcement efforts in past years, and now wants you to help too.
Tucked inside the Affordable Care Act is a new requirement for anyone engaged in trade or business to report all payments of $600 or more to any single vendor for services, goods, or property, beginning January 1, 2012. Currently businesses only need issue these Forms 1099 for rent, interest, dividends, and non-employee services, not goods or property, and are generally not required to send to corporate vendors.
While you won’t actually have to issue the 1099s until January of 2013, the record keeping nightmare- assuming Congress does not repeal or amend the requirement- will begin January 1, 2012. Buy pizza once a week for your employees? Don’t forget to ask the pizzeria for their Tax ID and send that 1099. Stay at a hotel for a conference? Same thing. There may be confusion if you patronize two different Dunkin’ Donuts locations with different owners and different Tax ID numbers too. Are you a vendor using your Social Security number as your Tax ID? Might want to rethink that and get a Federal Employer Identification Number instead. On the plus side businesses will be forced to keep more meticulous records and the tax gap should shrink; the downside is that it will take some getting used to for businesses without good systems and will cost money and time to implement. As a concession to ease some of the burden, the IRS has proposed regulations to exempt credit card transactions. If that comes to pass, business owners may choose to use credit cards as a matter of course, increasing costs to vendors (and ultimately consumers) and potentially causing a bias against those businesses that don’t or can’t afford to accept credit cards.
A lot can happen between now and next January, but it is a good idea to take some time in 2011 to get our recordkeeping systems up to speed to handle this requirement. Rental property owners won’t have that luxury though. The Small Business Jobs Act signed into law on September 27 now requires owners of rental real estate to issue 1099s for rental property expenses ($600 or more) such as lawn care or painting beginning in 2011. The IRS may decide to exempt certain landlords, possibly based on the amount of rental income, but like so many other tax issues right now, nothing has been decided yet.
Erin Baehr is a Certified Financial Planner™ and Enrolled Agent. She is the owner of Baehr Family Financial, a Fee Only financial planning firm in Stroudsburg, offering personal and business consulting on an hourly or retainer basis. She can be reached at firstname.lastname@example.org or 570-223-1550.