The IRS has changed its 2011 tax forms and added the following new questions on all business tax returns (including Schedule C for sole proprietors as well as partnership, LLC, and corporate tax returns), with the exception of Form 990, which asks for reportable compensation for highly compensated/key employees whether by 1099 or W-2:
- Did you make any payments in 2011 that would require you to file Form(s) 1099?
- If “Yes” did you or will you file all required Forms 1099?
Form 1099 is used to report certain payments to recipients and to the IRS. The most common 1099 type form is Form 1099-MISC which is used to report the payment by a business for services rendered to the business (there may also be Form 1099 reporting requirements if a business pays interest or dividends).
We have been following the progress of the bill to repeal the burdensome 1099 Reporting Provision that would have required companies to file a 1099-Misc for every vendor for any cumulative annual amount of $600 or more. The provision was expected to contribute $19 billion toward paying for healthcare reform but was widely critisized for the intense reporting effort it would require. With the President signing this bill, the funds will be collected from people who will have to repay excess amounts claimed above and beyond what they were entitled under the healthcare reform.
One of the components of the 2010 Health Care legislation included significantly expanded 1099 reporting requirements. The new rule would be that all corporations and organizations would have to report purchases over $600 and on rental real estate. The Senate and the House had dueling versions of bills to repeal the additional reporting requirements and spent a year duking it out. The Senate approved a modified version in February and the House has now approved it as well. The next stop is the President’s desk.
The Senate passed a bill on February 18th that included provisions to repeal the new expanded 1099 reporting requirements. The House Ways and Means Committee has also approved its own bill including a similar repeal with additional passages covering rental property businesses. The House bill includes some controversial off-sets involving getting some repayments from low-income and middle-income taxpayers who received credits and subsidies under the original health care act. The Senate’s version of the bill has non-specific offsets comprised of spending cuts as opposed to repayments. The House is expected to vote on the Senate’s bill when they return from recess.
See more about it here.
Yesterday the Senate approved an amendment to repeal the expanded 1099 requirements that were put in place with the Patient Protection and Affordable Care Act. The expanded requirements would require businesses to report any purchases of goods and services over $600 a year from another business or individual.
Senate Finance Committee Chairman Max Baucus, D-Mont said “We heard small businesses loud and clear, and today both parties came together in a bipartisan manner to respond to their concerns. Eliminating these paperwork requirements lets small businesses focus on the critical work of growing their businesses and creating jobs. ” He continued noting that the repeal is a “common-sense solution”.
Read more about the repeal here.
Signed by the President on September 27, 2010, the Small Business Jobs Act of 2010 provides a number of tax benefits for small and medium-sized businesses, but also contains some significant changes as to information reporting (1099s) and the penalties for failure to report. The following is a discussion of the major tax changes included in the Act that may be of interest to those in the nonprofit community with for-profit affiliates:
Section (§) 179 allows a business to write off the cost of furniture, computers, machinery and equipment acquisitions (tangible personal property) in the year of acquisition instead of taking depreciation deductions over a number of years. The current law allows a §179 deduction of $250,000 in 2010 but only a $25,000 deduction in 2011. The amount of the deduction is decreased dollar-for-dollar, if acquisitions exceed a threshold – $800,000 in 2010 and $200,000 in 2011.
The new law increases the §179 limit to $500,000 in 2010 and 2011. The limit begins to decrease if acquisitions exceed $2,000,000 and is reduced to zero if acquisitions exceed $2,500,000.
Not only is this increased limit a boon to companies looking to acquire property in 2011, it is a gift to those that have already made substantial acquisitions in 2010.
Section 179 for Qualified Real Property
As discussed above, the §179 deduction has previously applied only to acquisitions of tangible personal property. The new law allows a $250,000 deduction for acquisitions of certain qualified improvements to real property placed in service in 2010 and 2011. This $250,000 is part of the overall §179 deduction available; a taxpayer cannot claim $500,000 for personal property acquisitions and an additional $250,000 for qualified real property – the overall maximum is $500,000 of which $250,000 can be for qualified real property.
Qualified real property is either qualified leasehold improvements (QLHI), qualified restaurant property (QRP) or qualified retail improvement property (QRIP). The rules for what improvements meet the “qualified” standard are different for each of the three types of improvements.
QLHI must meet the following tests:
The building must have been placed in service at least three years before the leasehold improvement;
The improvements must be made subject to a lease;
The improvements must be to tenant space, not common areas, not an expansion of the building and not escalators or elevators; and
The tenant and landlord cannot be related (i.e. common ownership).
QRP is a building or an improvement if more than 50% of the building’s square footage is devoted to the preparation of, and seating for on-premise consumption of, prepared meals. Unlike QLHI and QRIP, QRP can be a brand new building or improvements in a recently constructed building.
QRIP is improvements to an interior portion of a building where such portion is open to the general public and used in the trade or business of selling tangible personal property to the general public. Also, as with QLHI, the improvements must have been made more than three years after the building was placed in service and not to common areas, enlargements or escalators and elevators.
Bonus depreciation is the option to write off 50% of the cost of new property acquired and placed in service. This was the law in 2008 and 2009 and has now been extended for property acquired and placed in service by December 31, 2010. Note that bonus depreciation only applies to new property whereas §179 is available for both new and used property.
When combining bonus depreciation and §179, §179 is taken first and bonus is applied to the remaining basis. For example, if in 2010 the company acquired and placed in service new machinery with a cost of $800,000, it could take a §179 deduction for $500,000 and bonus depreciation of $150,000 (50% x ($800,000 – $500,000).
Bonus Depreciation for Autos and Light Trucks
An additional $8,000 deduction is available for autos and light trucks acquired in 2010 that are subject to the “luxury auto” limit on depreciation. Since any such vehicle is one with a cost of more than $15,300 and a gross vehicle weight of less than 6,000 pounds, it applies to most vehicles a business may acquire for general transportation needs.
Note to the above four changes – neither Maryland nor Virginia accepts bonus depreciation or the increased §179 write-off. DC follows federal law.
S Corporation Built-in Gains
When a C corporation elects to become an S corporation, the S corporation is taxed at 35% on all gains that were “built-in” at the time of the election if the gains are recognized during the recognition period. The recognition period generally is the first ten S corporation years. A “built-in gain” exists if, at the time of the S corporation election, the fair market value of a corporate asset exceeds its tax basis. The most common built-in gains are (1) real estate, (2) goodwill (going-concern value) and (3) for cash-basis taxpayers, the excess of accounts receivable over accounts payable plus accrued expenses.
For tax years beginning in 2009 and 2010, no tax is imposed on the net unrecognized built-in gain of an S corporation if the seventh tax year in the recognition period preceded the 2009 and 2010 tax years. Under the new law, the recognition period is shortened to five years for gains recognized in 2011 (only in 2011) and would apply to any such S corporation that made the election effective for years beginning in 2006 or earlier.
This is a major planning opportunity for affected corporations and must be considered in any 2010 and 2011 tax planning.
1099 Reporting by Owners of Schedule E Properties
For payments made after Dec. 31, 2010, persons receiving rental income from real property would have to file information returns (Forms 1099) to the IRS and to service providers reporting payments of $600 or more during the year for rental property expenses. Exceptions would be provided for individuals temporarily renting their principal residences (including active members of the military), taxpayers whose rental income does not exceed an IRS-determined minimal amount (not yet announced), and those for whom the reporting requirement would create a hardship (under IRS regulations to be issued).
Note that this takes effect in a few months. Affected taxpayers will have to begin the process of obtaining tax identification numbers from service providers immediately. Do not plan to rely on the latter two exceptions noted above.
Significantly Increased Penalties for Failure to File Information Returns
For information returns required to be filed after Dec. 31, 2010, the penalties for failure to timely file information returns to the IRS would be increased. The first-tier penalty would go from $15 to $30 per unreported form, and the calendar year maximum from $75,000 to $250,000. The second-tier penalty would be increased from $30 to $60, and the calendar year maximum from $150,000 to $500,000. The third-tier penalty would be increased from $50 to $100, and the calendar year maximum from $250,000 to $1,500,000. For small business filers, the calendar year maximum would go from $25,000 to $75,000 for the first-tier penalty, from $50,000 to $200,000 for the second-tier penalty, and from $100,000 to $500,000 for the third-tier penalty. The minimum penalty for each failure due to intentional disregard would be increased from $100 to $250.
First tier penalties are for self-corrected forms filed within 30 days of the due date of the form. Second tier penalties are for self-corrected forms filed by August 1st. Third tier penalties are for any other unreported or underreported payments.
Self-Employed Health Insurance Deduction for S-E Tax
For 2010, and 2010 only, a taxpayer can deduct from self-employment income the cost of health insurance in computing his/her self-employment tax.
Senator Bill Nelson, Democrat of Florida, has proposed that businesses with 25 or fewer employees would be exempt from the new 1099 filing requirement. In addition, for businesses with more than 25 employees, the reporting threshold would be set at $5,000, rather than $600. For more details, read Robert Pear’s article titled “Many Push for Repeal of Tax Provision in Health Law”.
The 2010 Patient Protection and Affordable Health Care Act dramatically changes the Form 1099 reporting requirements for businesses.
Current Law: Businesses are required to file Form 1099-MISC to report payments to service providers to whom they paid more than $600 during the year. Payments to corporations are exempt from that requirement. Penalties for failure to file required Forms 1099 are $50 per occurrence with a maximum penalty of $250,000 per calendar year. Continue reading »
Contained within the recently enacted healthcare legislation are new form 1099-MISC reporting requirements that have the potential of creating significant tracking and paperwork burdens for your company. The government projects the new reporting rules will generate $17.1 billion of tax revenue through 2019, the theory being that those who do not get forms 1099 underreport their income. Though the new requirements do not take effect until 2012, planning now for their implementation will save you aggravation later.
Under the current rules, a business must issue a form 1099-MISC to report payments that aggregate to $600 or more during the calendar year to any single payee, excluding corporations. There are a few exceptions, the most notable of which are that payments to an incorporated law firm and to an incorporated health service provider are subject to these reporting requirements. Further, with few exceptions, such payments are generally for services. Purchases of equipment, furniture, supplies, and other tangible personal property were not reported. Continue reading »
HOW TO KILL A FLY WITH A THERMONUCLEAR WEAPON – OR IN OTHER WORDS, HEALTH CARE REFORM AND IRS FORM 1099
Form 1099 is CURRENTLY required to be sent to the IRS and a SOLE PROPRIETOR OR PARTNERSHIP if a business pays one of these entities over $600 during a calendar year for SERVICES. This rule may soon change if Congress has its way. Both the House and the Senate believe that unreported income can be collected by expanding these reporting requirements and this additional income can be used to help pay some of the costs of health care reform.
Under proposed legislation, all businesses will need to send a Form 1099 to ALL other businesses – sole proprietors, partnerships and CORPORATIONS – that they pay over $600 to in a calendar year. This includes services and PRODUCTS!!
Just think of all the businesses where we spend money. If a taxpayer is a manufacturer or a retail store, how many corporation vendors do they have? They will have to send each one a Form 1099. Continue reading »
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