Wednesday, July 28, 2010

Get Ready to Issue Staples Tax Form 1099 for Office Supplies

Section 9006 of the 2409 page new health care bill creates mandates for businesses that have nothing to do specifically with health care delivery, but everything to do with ways to pay for it.

Currently, IRS Form 1099 is issued by businesses to freelancers and independent contractors with whom they do business because independent contractors are not on the business’s payroll. As a result of the new law, beginning in 2012, businesses will be required to issue 1099 tax forms from any vendor from whom they purchase more than $ 600 per year. The new law makes two sweeping changes with respect to the issuance of 1099 tax forms. First, it expands their scope to track payments not just for services, as is currently the case, but also for tangible goods. Second, it requires 1099s to be issued not just to individuals, but to corporations as well.

Consequently, beginning January 1, 2012, if we purchase a copy machine and paper from Staples costing $601, we will be required to issue Staples, Inc. a 1099 at the end of the year. For businesses that do a lot of commerce with multiple vendors throughout the year, this will present quite a burden and expense because names and taxpayer identification numbers for each vendor as well as aggregate purchases per vendor will have to be submitted. The National Taxpayers Advocacy Office, which operates independently within the IRS, has expressed concern that these burdens will create incentives for businesses to limit the number of vendors with whom they work. The impact of the law will also create a huge advantage for big business at the expense of small companies. The reason is that larger companies will have better infrastructure to keep track of these payments for their customers as a means for staying compliant with the new IRS rules. Bill Rys, tax counsel for the National Federation of Independent Businesses, said of the new law, “It’s a pretty heavy administrative burden”, and this is particularly the case for small businesses without large in-house accounting staffs.

I think that credit card companies must pay a lot to lobbyists because a provision in the law excludes the burdens of filing 1099s when vendors are paid via credit cards. Wow, that’s a huge incentive for companies to charge more to credit. Parenthetically, I thought debt was the cause for the financial meltdown, and this law encourages more, not less. Also, many business owners can negotiate better finance terms from vendors directly than they can from Visa or Mastercard.

Government bureaucrats who have never run a small business are in charge of creating laws with the guise of helping small business without fully appreciating all the unintended consequences. The bureaucrats will get one thing correct. This new law will undoubtedly create jobs, probably not in the private sector, but most assuredly, it will result in more auditors hired by the IRS. As a small business owner myself, and one of some estimated 30 million sole proprietorships and subchapter S corporations, as well as two million farms and one million charities and other tax-exempt entities affected by this law, I’d like to say to Congress, thanks for your efforts, but no thanks for your so-called help.

The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.