New Form 1099 Misc Rule

Most of you know that you must file a Form 1099 to Partnerships and LLCs for services they provided to you of $600 or more. Starting in 2012 payments you make for services or products of $600 or more to any business including corporations will require a Form 1099 to be filed. So within your Office Supply category if you purchase $675 from Office Depot and $750 from Office Max and $680 from Staples. Each one will need a Form 1099 whereas this year and in 2011 you wouldn’t need to send one at all.

Some accountants feel this will make it easier. No more trying to remember the rules of which type entity you send a Form 1099 to. You simply send one to everyone for all amounts over $600. I agree that the rule is easier but I think than complying with the rule will be a burden on the small business owner.

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS whose employees assist taxpayers in resolving issues with the IRS. The TAS submits reports twice a year to the IRS. In the July 2010 report they too have identified this new requirement as a potential burden that might not have the intended result in increasing revenue from improved tax compliance. After all the whole reason Congress came up with this scheme is to increase revenue they believe is missing. They believe if they force those who are purchasing services & products to report to them how much they purchased from an entity, the entity will in turn be required to report the total of all the Form 1099s as their gross income. During 2011, TAS will study the impact of the new reporting requirement more closely and depending on what the study finds they may propose recommendations to modify the provision.

Meanwhile my recommendation would be to make changes to your tracking system in 2011 as if the new requirement were all ready in effect. That way you can be tweaking it as you find issues throughout the year. Then when 2012 hits and you have to be tracking it you will already have discovered potential issues and the transition will go more smoothly.