When Congress passed the Health Care Bill in March, they inserted a seemingly insignificant section that will eventually have sweeping implications. It will increase accountability for the small business taxpayer to keep accurate records and make it more difficult for business to claim improper business expenses to offset revenues during the tax year.
Cross-posted at D. J. Marcus's Tax Blog
What does it say?
Section 9006 of the bill amends Section 6041 of the Internal Revenue Code in the following way:
SEC. 9006. EXPANSION OF INFORMATION REPORTING REQUIREMENTS.
(a) IN GENERAL.—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.
The original section of the Internal Revenue Code reads:
Sec. 6041. Information at source
(a) Payments of $600 or more
All persons engaged in a trade or business and making payment in
the course of such trade or business to another person, of rent,
salaries, wages, premiums, annuities, compensations, remunerations,
emoluments, or other fixed or determinable gains, profits, and
income (other than payments to which section 6042(a)(1),
6044(a)(1), 6047(e), 6049(a), or 6050N(a) applies, and other than
payments with respect to which a statement is required under the
authority of section 6042(a)(2), 6044(a)(2), or 6045), or $600 or
more in any taxable year, or, in the case of such payments made by
the United States, the officers or employees of the United States
having information as to such payments and required to make returns
in regard thereto by the regulations hereinafter provided for,
shall render a true and accurate return to the Secretary, under
such regulations and in such form and manner and to such extent as
may be prescribed by the Secretary, setting forth the amount of
such gains, profits, and income, and the name and address of the
recipient of such payment.
Combined, the relevant edits produce:
Sec. 6041. Information at source
(a) Payments of $600 or more
All persons engaged in a trade or business and making payment in the course of such trade or business to another person, 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 (other than payments to which section 6042(a)(1),6044(a)(1), 6047(e), 6049(a), or 6050N(a) applies, and other than payments with respect to which a statement is required under the authority of section 6042(a)(2), 6044(a)(2), or 6045), or $600 or more in any taxable year, or, in the case of such payments made by the United States, the officers or employees of the United States having information as to such payments and required to make returns in regard thereto by the regulations hereinafter provided for,shall render a true and accurate return to the Secretary, under such regulations and in such form and manner and to such extent as may be prescribed by the Secretary, setting forth the amount of such gross proceeds, gains, profits, and income, and the name and address of the recipient of such payment.
What does this mean for your business?
Normally, you would tally up receipts for your payments to your vendors and include them in the relevant sections of your tax return as business expenses. Now, with these changes, you will have to issue a 1099 to each vendor, whether individual or corporation, from whom you purchased over $600 of goods or services during the fiscal year and send a copy of that 1099 to the IRS. This is in addition to the 1099s you had to issue previously.
You'll also be receiving a 1099 from each business to which you sold over $600 of goods or services.
Each new 1099 will need to be reported on your tax return at the end of the year.
The buzz on the internet is that this will create mounds of unnecessary paperwork for small businesses across the country. It is true that the number of 1099s will increase significantly, however, I see two positive implications of these changes. First, it will force business owners to keep better records, report income more accurately, and pay the proper amount of taxes. Second, will also cut back on fraudulent business deductions, which will ease the burden on the IRS to catch tax cheats and, hopefully, save the rest of us honest taxpayers the hassles associated with overbearing IRS scrutiny. The work involved in issuing 1099s to your vendors and processing the 1099s you receive will not be overbearing. Think of it as high school math class - you don't get an A without showing your work.