Saturday, February 5, 2011

1099 Form Reporting Repeal? — Not So Fast — And Not The Whole Enchilada

The headlines have been trumpeting that all is right in the world — that the huge expansion of 1099 form reporting contained in the Health bill has been struck down – not so fast.

Thanks to the Health bill, IRS form 1099 – the form for businesses to report on certain transactions — is infamous. Form 1099 even got its moment in the sun during the State of the Union speech when it was condemned by the President. Who says tax administration is boring?

The Senate for the 6th time (seventh? I’ve lost count) voted to repeal the expansion of Form 1099 reporting that was contained in the Health bill. The expansion of Form 1099 in the Health bill was basically that payments over $600 to corporations had to be reported (not just sole proprietors, pass-thru entities, etc.) and that includes payments for both property and services. The expanded Form 1099 requirements in the Health bill are effective January 1, 2012.

Lost though in the grabbing of pitchforks and lighting of torches is the other recent expansion of Form 1099. This expansion of Form 1099 was contained in the recent Small Business Jobs Act that was signed into law in the Fall. This expansion of Form 1099 is already in effect (it was effective December 31, 2010) and expands the reach of Form 1099 reporting to those who receive rental income from a Summer home or a second home. Previously Form 1099 only hit those in the trade or business of rental properties.

So under the new law if you have rental income from a Summer home, renting your own home or a second house, you now have to provide a Form 1099 for payments made of $600 or more to a service provider (such as a plumber, painter or accountant). You will get to know your accountant better. Happily members of the military are exempt from this new requirement if they are renting their primary residence on a temporary basis. Quite frankly my great concern is all the plumbers and painters (and their accountants) who will receive inaccurate or incomplete 1099s. The ferris wheel of fun never stops when it comes to trying to correct an inaccurate 1099 with the IRS. (See more on the landlord requirement here

The Small Business Jobs Bill also increased all the penalties for failing to properly file a Form 1099 (Section 6723 for those keeping score at home).

Now back to today. The Senate bill ONLY repeals the Health bill expansion of Form 1099 — it does NOT change the expansion of Form 1099 regarding rental income or the increased penalties contained in the Small Business bill. To be fair — the Health bill expansion is certainly the big part of the enchilada. However, in recent speeches I’ve been struck by how many accountants and business owners have been understandably confused by all this and have thought the whole enchilada (“wet”) would be repealed — both the Health bill Form 1099 expansion and the Small Business bill real estate Form 1099 expansion. Repeal of the real estate Form 1099 provision is not in the cards at this time (and quite frankly it isn’t viewed as happening — barring a lot of drum beating from the public).

Further — repeal of the broader Health bill Form 1099 provision isn’t happening tomorrow (although it may be sooner than I thought). The Senate added this amendment on striking the Form 1099 expansion to the Federal Aviation Administration (FAA) reauthorization. The FAA bill is basically on the floor as a time-killer while the Senate is waiting for the House to send a continuing resolution. It is not known whether the FAA bill will even go forward. In some ways the amendment was a cover vote for Senators who had to vote against repeal of the overall Health Care bill (ie what could be viewed as a vote “for” the expanded Form 1099 provision).

However, help is on the way. It is expected that the House will pass this March a clean bill (with no offsets unlike the Senate bill) just on the issue of repealing the Form 1099 provisions contained in the Health bill (again nothing regarding the real estate Form 1099 provisions in the Small Business bill). The House effort is to signal that they are making progress on repealing the overall Health bill (the first crack in the wall if you will). The Senate may then horse around with the House bill repealing the Health bill Form 1099 provisions when it comes over — due to the fact that the House is unlikely to offset the loss of revenue (the Senate seems to have a different view almost every week on whether the repeal of the Health bill Form 1099 provisions should be paid for or not).

It’s a little too early to tell but I would lean to the view that at the end of the day that Senators will accept the House bill and pass it and put this issue behind them. But repeal of the Health bill’s expanded Form 1099 provisions is not happening today or tomorrow and when it comes to the expansion of Form 1099 reporting for real estate and rental income — that may never happen. Enjoy the enchilada — even though it may be a little cold when it finally arrives and not as filling as you hoped.

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