Richard A. Lindsey, CPA

Lindsey & Waldo, LLC – Certified Public Accountants

  • Aug 20

    Hidden deep inside the massive 2,409 page health care reform bill are a few lines which will unleash a flurry of paperwork on unsuspecting businesses. Beginning in 2012 companies will have to issue 1099 forms not just to contract workers, but to any individual or corporation from which they buy more than $600 in goods or services in a tax year.

    I expect businesses to have to issue billions of new tax documents each year.

    Currently the IRS Form 1099 is used to report income for unincorporated businesses which provide services to businesses. Primarily businesses use them to document payments to independent contractors.

    But, under the new rules, if you buy a new computer from Best Buy, you’ll have to send them a 1099. A laundromat that buys soap each week from a local distributor will have to send the supplier a 1099 at year end. The local restaurateur will have to send 1099s to each of his food suppliers, his linen or laundry service, his small wares supplier, his beer and liquor distributors, his electrical utility, and on and on and on.

    The new law makes two key changes on how 1099s are used. First, it expands the scope from only services to include all tangible goods and second, it requires that 1099s be issued not just to individuals but also to corporations.

    “It’s a pretty heavy administrative burden,” particularly for small businesses without an in-house accounting staff according to the National Federation of Independent Businesses.

    The IRS estimates that more than $300 billion is lost in unreported tax revenue each year. Using 1099s to document millions of transactions that now go untracked is one way they believe they can close the tax gap.

    While the notion of mailing a tax form to Office Depot or Sam’s Club each year likely seems absurd to most small business owners, some tax experts say that’s not the worst of it. The biggest headache will be gathering the names, addresses, and taxpayer ID numbers for every payee and vendor you do business with.

    According to a recent report, the SMC Business Councils had previously surveyed its members and learned that they file an average of ten 1099 forms a year, each of which takes about an hour to prepare. That’s in line with the GAO report, which found that a typical small business spent between three and five hours per year filing 1099s.

    But SMC’s survey found that extending the 1099 filing requirements to include services performed by corporations pushed the count to at least 200 filings per year – adding an estimated $6,000 to the preparation costs. The survey didn’t even consider the added burden of filing 1099s for purchases of goods because it just wasn’t on any one’s radar.