New Law Repeals Tough Reporting Rules

Responding to a loud public outcry, Congress has repealed tough new 1099 reporting requirements for businesses that were supposed to take effect in 2012. The new federal legislation, called the “Comprehensive 1099 Taxpayer Protection and Replacement of Exchange Subsidy Overpayments Act of 2011,” was signed into law by the president on April 14, 2011.

At the same time, the new law repeals comparable reporting requirements for landlords that were also scheduled to begin next year. However, other reporting rules for owners of rental properties remain in effect.

Background: Under long-standing rules, a business is required to report payments on Form 1099 when it pays $600 or more per year to an unincorporated independent contractor for services. This also includes payments such as commissions, fees, interest, rents, royalties, annuities and other income items.

Both the IRS and the contractor must receive a copy of the 1099. It should indicate the amount, the taxpayer identification numbers (TINs) for both parties and the relevant contact information. Failure to provide proper 1099s can result in penalties of $100 per failure. As a general rule, payments to corporations are exempt from these reporting rules, with limited exceptions.

However, the massive health care law signed in 2010 imposed new reporting requirements on businesses, scheduled to take effect in 2012. The rules continued to apply to annual payments of $600 or more to a recipient, but there were three major changes.

  1. Payments to corporations: The reporting exemption for corporations was removed. For example, if you paid over $600 to a company for providing your firm with technology services, you would have to report the payment on Form 1099.
  2. Payments for goods and merchandise: The reporting requirement was extended to payments for property such as goods, merchandise, equipment, raw materials and the like. In other words, a manufacturer that purchases supplies costing $600 or more from a vendor would have to report the payments.
  3. Payments of gross proceeds. The health care law also applied the 1099 reporting rules to payments of “gross proceeds,” which could cover a multitude of situations like payments for meals at unincorporated restaurants and diners.

Similar reporting rules affect payments by owners of rental properties for expenses relating to their properties. Under the small-business law enacted in 2010, landlords must report payments of $600 or more to independent contractors, just like a business, beginning in 2011. The health care law also extended the more burdensome reporting requirements, as explained above, to rental property owners beginning in 2012.

In other words, both businesses and landlords were anticipating a recordkeeping nightmare and an avalanche of extra work. But now the new law repeals the new 1099 reporting requirements for businesses and landlords that were slated for next year. It is as if this section of the health care law never existed. So you can rest easier about your responsibilities.

Caveat: Be mindful that you must still comply with the previous set of rules for 1099 reporting. Consult your tax adviser concerning your situation.