Form 1099 Update – Rules are Relaxed for Rental Activity and Purchase of Goods

Stan Rose, Tax Director

“Change is good!” we often are encouraged to believe.  However, some law changes in the last year or so significantly expanded Form 1099 filing requirements, and the rules were widely panned.  The onerous burden created by the new rules left many business owners (and their accountants) howling for a reversal and Congress listened.  Most of the new requirements no longer exist, but some survived.  Several clients have called asking for clarification as the upcoming filing season nears, so an update on those requirements seems in order.  The lesson, in this and many other cases, is that change is not universally good; it is good only if a person’s position is improved by the change!

Early in 2011, we shared a newsletter article explaining four changes that recently had been made that would impact either 2011 or 2012 payments, and therefore Forms 1099 to be filed in January 2012 or 2013.  Each of those four changes increased taxpayers’ Form 1099 filing burdens (change is bad!).  Two of those unfavorable requirements now have been reversed (change is good!).  Following is a summary of both the changes and the reversals. 

Form 1099-MISC required for purchases of tangible goods - REPEALED

Beginning with 2012 payments, Form 1099-MISC was to be required not only to report payments for services made in a trade or business (as has long been the case), but also purchases of tangible goods.  This requirement was reversed before it was implemented. Prior to its reversal, it caused the loudest uproar because it cast far too wide a net.  For example, a sole proprietor who bought at least $600 of supplies throughout the year from an office supply store may have been required to obtain a taxpayer EIN from and issue a 1099-MISC to that entity. This was repealed earlier this year by H.R. 4, the “Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011.”  Unchanged is the long-standing requirement that in the context of a trade or business, cumulative payments to a recipient for services of at least $600 still require a Form 1099-MISC.

Form 1099-MISC required for rental activity – REPEALED

Recall that Form 1099 must be filed by trades or businesses. Before numbering among the four unfavorable changes described above, rental activity generally was excluded from that definition (some exceptions existed).  However, for payments beginning 1/1/11, real estate rental activity was included and all landlords became subject to the general rules.  This new requirement was reversed by H.R. 4, and the rules that applied prior to the first change are now back in effect.  Although the reversal took place before Forms 1099 were filed (due January 2012), undoubtedly some taxpayers began collecting tax EINs from recipients, and those EINs no longer are needed.

Form 1099-K required by credit card processers – NOT repealed; still required

Beginning with payments made 1/1/11, credit and debit card transactions became subject to expanded requirements.  Financial firms (often banks) that process credit card transactions must file a new Form 1099-K to report payments made by the processer to the merchants who initiated the underlying sale.  This rule also requires online networks to report similar payments made to their online sellers.  These requirements apply only if the number of the processer’s transactions with a merchant exceeds 200 and the combined dollar amount of the transactions exceeds $20,000 in any given year.  For financial firms handling such processing, this is a huge increase in filing requirements.  Merchants who meet the thresholds should be prepared to provide their own tax EINs to financial firms who have never requested them in the past. 

Form 1099-B required by brokers– NOT repealed; still required

Forms 1099-B report sale proceeds generated from the disposition of securities.  Beginning with 2011 forms (to be filed in January 2012), the cost of the securities sold, as well as the character (long-term vs. short) will be added to these forms.  Until now, that information often accompanied Form 1099-B as a courtesy, but it was not required and it was not reported to the IRS.  Significantly, the cost and character will be reported only for sales of securities that were purchased after 12/31/10.  In most cases, this change requires no action on the part of the security owner.  It does, however, require some awareness:  Note that certain securities may have a tax basis that differs from the acquisition price.  (Shares acquired in a tax-deferred transaction are one example.) Also, various methods of tracking cost are permissible under many circumstances.  (Specific identification; first-in, first-out and average cost are examples.)  Also, cost is not required to be reported for pre-2011 purchases, and this disparity could be confusing, depending on its presentation on the Form 1099-B and supporting schedules.  For acquisitions made in 2011 and later, taxpayers should be in close communication with their brokers to ensure their records reflect the appropriate basis.

Other odds & ends

This article does not attempt to describe the many general requirements that were unaffected by these changes.  The general Form 1099 requirements can be found in the IRS instructions, all of which can be found on their website.  An index may be found at the following link. http://www.irs.gov/app/picklist/list/formsInstructions.html?value=1099&criteria=formNumber

Perhaps in exchange for the filing requirements being somewhat eased, the penalties for not filing Forms 1099 properly have been increased. Those penalties are based on several variables and are summarized on page 11 of the instructions found at the following link. http://www.irs.gov/pub/irs-pdf/i1099gi.pdf

Conclusion

Form 1099 filing requirements have taken us for a bit of wild ride in recent months.  Fortunately, some of the widest-reaching and most burdensome of the new rules were negated before they could do anything worse than scare us. Perhaps we can agree that with the recent reversal, “change is good.”  However, the existing rules are complex and burdensome enough, and now are accompanied by increased penalties for noncompliance.  In any case, whether you are an eternal optimist or a confirmed curmudgeon, if you issue 1099s or receive them, we hope you found this update useful.

This article is provided for information purposes only and should not be relied upon for legal or financial advice. We would be happy to discuss how the Form 1099 requirements impact your business. For more details about this matter, please contact your BNN tax professional at 800.244.7444.

IRS CIRCULAR 230 DISCLOSURE:

Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter.  Please contact us if you wish to have formal written advice on this matter.