Friday, July 16, 2010

New 1099 Rules Could Spell Big Problems for Small Business

As we wait now for the President to sign the financial reform bill into law, I wanted to take today to talk about another huge looming problem for small business--the new 1099 rule. Last week the IRS announced that the new 1099 rule is going to be burdensome and difficult for small businesses to comply with. They are not exactly champions of the little guy, so when the IRS is sounding a warning we tend to sit up and listen.

We are talking specifically about the provisions of the health care bill which increase 1099 reporting requirements for all businesses purchasing goods or utilizing services over $600 in the course of a year. The new requirement, which goes into effect in January of 2012, promises to have disastrous consequences for small businesses owners and sole proprietorships.

Traditionally businesses have issued 1099s for contract labor. For instance, traditionally many loan officers received a 1099 at the end of the year from their employer. In our office, our employees were always W2d, but that was the exception, not the rule. In terms of services that we utilized, our two primary services that we ordered were appraisals and surveys. But we did not issue 1099s to corporations--only to individuals.

Currently, according to a number of sources, the average business owners issues about 10 1099s for the year. But imagine a world--which will soon be a reality--where every vendor from whom we purchase over $600 cumulatively over the course of the year must be 1099d. We will be issuing 1099s to Sams and Walmart as well as to any local businesses we use.

What about those of us who work in businesses where we routinely entertain as part of our business. As this was explained to me, we must 1099 the restaurants if we have spent over $600 in the course of a year. And, if we travel frequently for business, we must 1099 the airlines.

Of course, the tax payer identification number for each business we 1099 must be on the form, so we will have to obtain at taxpayer ID number for each business we frequent. I do believe that all companies will add their taxpayer ID number to their receipts to make compliance possible; otherwise we will be sitting on the phone for weeks trying to get the taxpayer ID numbers out of each company we have done business with over the course of a year.

The purpose of this new law is to ferret out transactions that might slip under the radar for tax reporting purposes and to make certain that all businesses are reporting all of their income. But the reality is that laws like this actually ultimately decrease the tax revenue that the government could collect. How? A burdensome bill such as this one makes it very hard for small businesses to comply, but it does more than that. Think about it--if you have to give a 1099 to everybody you buy office supplies from all year, don't you want to limit your supplier to one large company that is going to have its Taxpayer ID printed visibly on its receipt rather than frequenting local businesses part of the time and buying occasional items at the super store. In addition to compliance issues, this bill is going to put small businesses at a huge competitive disadvantage as buyers consolidate their sources. And since small businesses and entrepreneurship create most of the jobs in the United States, as small businesses fail, unemployment goes up and the tax base of working Americans who are contributing to the economy goes down. So in an attempt to squeeze every drop of taxable income out of American businesses, the bill actually does the opposite and creates less revenue.

Maybe all of us who are being unemployed by all of these excessive regulations should go back to school and get accounting degrees. With so many new rules in place, the days of Turbo Tax are probably going to be ending (has somebody told Tim Geithner?)so we can all try to get jobs helping the business that do survive file their income taxes.

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