New Tax Recordkeeping Rules Will Cost Small Businesses

By Joel Handelsman, Toolkit Staff Writer

The recently enacted Patient Protection and Affordable Care Act has some hidden consequences for small businesses. What many business owners would consider inconsequential expenses will soon have to be tracked and reported, both to the recipients of the payments and to the IRS.

Beginning in 2012, small business owners will have to keep a lot better records regarding payments to anyone that total $600 or more. And, they will have to provide both the IRS and the payee with a Form 1099 that reports the amount of the payments.

Congress apparently views this requirement as a revenue raiser. If you report the payments, the recipient will also have to report them, since they will be officially "documented" by the Form 1099. However, the unintended consequences of this revenue-raising scheme have already given rise to proposed legislation to repeal the reporting requirement.

Consider a small business with just a few employees that orders pizzas for lunch every Friday. If the total amount paid to the pizzeria hits $600, the business will have to prepare and submit Form 1099. The same is true if a business buys $600 or more of office supplies from one store. It doesn't matter whether the recipient of the payments is a business or an individual.

The real downside of this new rule isn't the reporting requirement, it's the recordkeeping requirements necessary to comply with the rule. Imagine the accounting nightmare of having to track whether or not a business has paid $600 to a gas station for a company vehicle. Many small businesses are already hard-pressed to keep track of major expenditures in order to comply with existing tax reporting requirements. This rule will increase the difficulty exponentially.

Under the new rules, anyone engaged in a trade or business for profit, as well as nonprofit and tax-exempt organizations, will have to file Form 1099 for each payee who receives $600 or more in a year. This includes compensation of any kind (salaries, wages, commissions, fees, incentive awards) as well payments for items such as interest, rent, royalties, annuities, or pensions. Payments to corporations are also subject to the reporting rules, so if a business pays the phone company $600 or more, the business must complete a Form 1099.

Fortunately, if a business is required to furnish employees with a Form W-2, Wage and Tax Statement, it won't have to also provide a Form 1099. However, reporting will be required with respect to all amounts of $600 or more paid in consideration for property or gross proceeds for property and services. Also, payments to tax-exempt or governmental organizations, international organizations, and retirement plans are not subject to the reporting requirements.

Supporters of the new health care reform law insisted on these recordkeeping changes as a way to offset the costs associated with that $1 trillion major insurance reform. Increased use of Forms 1099 will allow the government to more closely track the economic activities of employers, employees and independent contractors. Supporters claim the new recordkeeping requirements will mean billions in additional tax revenue flowing to the federal government.

In short, Congress has created a compliance nightmare for small business owners. And, those who don't comply can face penalties for failure to file information returns, failure to furnish payee statements, and failure to comply with other reporting requirements.

Posted July 22, 2010.