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Senior Advisor

1099's you will have to issue

Here is a tax law that is almost unbelievable.  Starting in 2013 (for 2012) you will have to issue a 1099 for any amount over $600 that you spend at Lowes, Menards, Home Depot, Tractor Supply Company, the repair shop, your seed dealer and more.  This is worth a read.  Hopefully, someone will come to their senses or this will become a bookkeeping nightmare.

 

http://www.farmgate.illinois.edu/archive/2010/06/new_tax_law.html

 

"Summary:
Recent changes in the tax code will require farmers to issue Form 1099 to any business which was paid more than $600 in the prior tax year. Such payments would include interest, seed, chemicals, fertilizer, parts and repairs, and other usually deductible items on the farm. The requirement will cause taxpayers to collect names, addresses, and federal tax identification numbers for those many companies which provided goods or services in the prior tax year.
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Frequent Contributor

Re: 1099's you will have to issue

From Bloomberg News:

 

Health-Care Bill Surprise: 1099 Nightmare
2010-05-27 20:01:20.626 GMT


By John Tozzi
    May 27 (Bloomberg Businessweek) --

 

... 

 

  Representative Dan Lungren (R-Calif.), with the support of
small business advocates, has introduced a bill to roll back the
provision. He says it imposes extra costs on business owners who
pay their taxes to help the government catch those who don't.
"This paperwork burden is only justifiable if you assume that
nearly all businesses are cheaters," says Lungren. The bill would
force "every single businessperson to become an IRS agent."

 

...

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Re: 1099's you will have to issue

If I recall correctly, this only affects farmers who are operating as a corporation of some type.  I may not have that quite right but I know my wife is an accountant and said it will really not be much more work for her existing farm clientel as the software is easier to utilize if everyone is issued a 1099 and not just going through to pick the few that are needed now.

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Issuing the forms will NOT be the problem---- any decent software can accumulate the data.

The problem will be----------------when the IRS calls you, and says that you owe 30,000 in additional taxes, because you have not reported all of the income that the 1099's that THEY received from other taxpayers shows that you received.

 

It will make no difference who is right or wrong, the burden will fall on YOU to prove to IRS that you either included all those "extra" 1099's in the income of, say, your corporation, or the partnership you are in, or that the person/business issued the 1099 in your name in error and that it should have been issued to your father, or son.......that is going to be the mess.

 

We had the situation a while back where a business incorporated about three years ago---------but people were still issuing 1099's in owner/shareholders personal name................IRS sent him a personal bill for literally thousands and thousands of dollars.   Cost a pile of money for us to prove to IRS that every one of those 1099's were reported in corps.

 

The problems in doing it "smoothly"----------people used names on the 1099's different from the names used in the business's records, 1099's were issued for amounts different than the amounts actually received, amounts per 1099's were accumulations of all the transactions during the year so had to "pick and choose" all of the component transactions, etc etc etc.

 

In the perfect world, where no one makes mistakes, the process could be done easily-----------but bookkeepers make mistakes, etc etc.

 

And I still have not figured out what the 1099 accumulation will do anyway, unless the taxpayer's income reporting forms (Sch F, etc.) are revised to show "income amounts included in 1099's" and "those not included in 1099's".

 

Every taxpayer will have to record/accumulate all income items so that they can "match" the 1099's they receive.........which means then that everyone will have to use a common id in that transaction, ie the same id they use when issuing a 1099.  In that manner, the recipient's records will parallel/mirror the payor's records, so that when the payor issues a 1099, all of the name/number data will match exactly.

 

All for the purpose of..........????

 

IRS had better get a lot more feed for the squirrels who run the tread mills that supply power to the computers, 'cause there is going to be a LOT of computer time trying to match 1099's.

 

 

 

 

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Honored Advisor

Re: Issuing the forms will NOT be the problem---- any decent software can accumulate the data.

That has been a minor problem in working with our integrator, when we changed which LLC was actually contracting to raise the pigs.  They still kept issuing 1099s for the old entity.  I was adamant about getting it issued to the right one, for many reasons, including taxes.  

This dual-entity setup was certainly helpful on my recent  worker's comp audit, since one LLC owns the facilities and maintains them; the other actually raises the pigs, employs the workers, renting the facilities from the owning entity.  That alone eliminated the need to prove workers' comp coverage for my electrician, for example, since he is paid by the wning entity, not the employing one. 

The other issue we've had some ongoing difficulty with on 1099s is with the mining company that leases my farm in VA.  They make two annual lease payments to me, as the owner of the land.  One of them was no problem, but the other rental paymnet kept turning up on the 1099 as "non-employee compensation."   I took us four or five years of correcting them from my end to get it straight. 

Then, in reimbursing me for a large legal bill last year, they coded non-employee compensation again.  This time, I did not try to self-help.  I put my CPA on their tails.  She worked on them pretty hard for a good while to get this corrected, but it was finally done.  I loved the way she did it, too, by continually asking them to "define what services my client has rendered."   

I think that a lot of people will let this sort of thing slide, especially in terms of the name, as you note.  This will cause a lot of us to start making sure that things are correctly done. 

I do believe that there can be a wholesale abuse of the 1099 form - as we saw in the builder who constructed our farm and some of his workers.  Some of those boys were given forms for far more than they earned in the year...but a lot of construction workers are not the best recordkeepers, so they had no way to prove what he did or didn't pay them.   They ended up owing at lot of his income taxes. 

A crooked contractor will pass off a lot of his own income in the names of some of his "subs."  That a lot of this is abuse of the workers' comp employee v sub definition is another whole ball of wax, too. 

I am a lot more cognizant of these issues now than even just four or five years ago.  Our integrator just required workers' comp from its growers, and proof annually from each of us, since a grower had an employee fall and sue all the way to the tip of every pig's tail.  As usual, it takes a previously unrecognized exposure to make the whole system aware of a serious oversight. 

My guess is that someone at the IRS has figured that there will be some sort of windfall from turning up unreported income - in the form of over-reported expenses - at least for a while.  

Sure,  good software will help a lot, but some of us are still grappling with the Quickbooks Simple Start, Jake. 

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Re: Issuing the forms will NOT be the problem---- any decent software can accumulate the data.

First...........contractor can issue any 1099's he wants,   However, there is no way within his records to hide that income in the form of subcontractor payments.........if the auditor has any sense at all.   Frankly, that would be an elementary review.

 

Second--------crap can Quickbooks, and get an alternative like Peachtree that does not cost any more, and has the "traditional accounting structure" already built into its standard, pro formed reports.

 

Defining vendors/customers within it--------duck soup..............just as easy for the inputer as Quickbooks, but requires more precision so the output can be managed better.

 

ANother...........calling moneys non-ee comp or whatever in a 1099 should be no more of an issue than nothing.............that is merely commented upon in the tax return if a material issue, and handled as it should be handled........rental income, royalties, whatever.  I would have been embarrassed to send a client a bill for spending time on that issue with a customer.

 

A much bigger issue than worrying about what a 1099 says is why in the world would any one with any tax savy put operating ag businesses into LLC's?????

 

Lastly----------"here" the work comp audit would not make a difference as to entity........totally on class of employee.  For example, if had a secretary at the farm office, she would be a secretary, not a farm worker.

Our personally-owned corps are audited each year for work comp..........and when we have cross-over ees with respect to jobs, the times are recorded as such..........never had a hassle.

 

Best wishes.

 

 

 

Honored Advisor

Re: Issuing the forms will NOT be the problem---- any decent software can accumulate the data.

Thanks for the software recommendation. 

 

The contractor in question was a crook, and I am sure got away with hiding a lot of his income on his employees ,  who he called subs. 

 

My CPA did not raise my bill for finally forcing this bunch to code my income stream scorrectly...the bill did not go up from previous years.  We were both just tired of having to make allowances for their mistakes.  I just think the biggest corporation in the world in that mining business ought to be able to make a proper 1099.  

 

As for the LLC decision, I chose them for my own stupid reasons, almost 20 years ago.  Our family had always been farming as  sole proprietors or partners.  It's so enmeshed in our estate planning and other stuff now, I shudder to think what effort and expense would be entailed in changing it. 

 

The comp audit is strictlly for our hog  farm workers, so the premium is based upon that...the audit was to verify that I was paying  for enough coverage.  If I had been paying any subs, I had to either prove their own coverage, or pay on them myself. 

 

I wish I had been privileged enough to have had an education in finance.  We'd probably be in a much better position than we are in now, if so; but, I do the best I can for someone taught to teach kindergarten.  Our attorney is happy with the way we've organized thigns, and our accountant has only asked me to computerize my records to make tax time easier on me.  Worst tax burden I ever paid in my whole life was in a sub-S corp...and that was not my accountant's fault. 

 

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Honored Advisor

Question - LLC

I am truly surprised that you are so anti-LLC for ag businesses. 

 I chose this type of entity many years ago, but our integrator - Murphy Brown - is an LLC of much more recent vintage, and it is certainly one of the largest ag businesses in the nation.  I would certanly have thought that if a corporate form of organization was more beneficial, a company of that magnitude, which clearly quailfies as agricultural,. would have formed one.  I can point to other big ag LLCs, btu tath one is sufficient as an example.

Can you tell my why you say that this form of business organization is not "tax savvy"? 

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Re: Question - LLC

I know nothing about "Murphy Brown"--------but your statement that they are quite large says a lot.

Most likely they have numerous owners.........and numerous divisions. 

 

Using a pass-thru entity like LLC or S corp allows the multiple divisions to filter to the income tax returns of the partners-------so that if one division (LLC) is not doing well, that loss would be matched with the gains of another LLC, on that one return of that one partner.  In other words, one can have multiple interests, and effectively combine them into one tax effect.  Further, the self employment tax situation would not hinder, since most likely the vast majority of the owners/partners/members would be passive anyway.  Lastly, the combination of the multiple LLCs into one number on the passive individual members return would effectively allow the offsetting of passive gains and losses.

 

Your situation----------or, at least the "usual" situation---------- is that the owners are the operators, and are in total control of all matters, including being effectivley required, for example, to leave a significant portion of the earnings inside the business.   Contrast that to some operation like this Brown outfit, which logically would have a lot of "investors" as owners, and therefore would be looking for a consistent if nominal return------what?  5%??

 

So......using a pass thru entity in closely held situation bypasses all of the benefits of being able to more cheaply internally finance............and, does not allow employee benefits to the owner/employees such as meals, lodging, etc etc.    Recall that LLCs which are taxed as partnerships are not allowed ee benefits to members.........same as partnership rules.

 

etc etc

 

If you're happy---------good.

 

If you were a client of mine, and making money, but having to finance things yet, and had some business life left..............you would not be an LLC..........or LLC group.    Zero tax benefits.  I would be working to kill that LLC and get you set up in a useable structure.................most common arrangement-------- C corp for operations, S corp for owning appreciating assets such as real estate.

 

Any benefits related to being LLC at time of liquidation can be EASILY overcome by prior proper planning before that liquidation, if a corp.

 

No differences for extent of recordkeeping.

 

Some practitioners have told me........privately...........that they like the LLC because it takes heat off them at time of tax return preparation---------they believe they can make mistakes, and since all pass thru to individual returns  (like S corp), they won't get hammered by IRS for negligence.

 

That is pretty much hogwash......pure laziness............and those practitioners do not get referrals from me for anyone in their areas.

 

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Re: Question - LLC

Sorry for failing to define MBLLC -  it is the production side of Smithfield Packing.  Largest pork production entity in the world, from what I understand.  This was the last organizational step, after many years of corp mergers and acquisitions. 

All of the tax info you supplied seems to contradict what I am reading today - that any type of filing may be elected by an LLC  - pass-through to individual, or just like a sub S or C corp.  That would appear a lot more flexible to me. 

Essentially, I have one LLC for ownership, one for operations, and the taxes can be handled any way we choose.  No longer borrowing, making very good money, plenty of business life left in us at 55/56, and with a young heir (30) active in the operation, hopefully plenty after we are gone.  As I look at any other large contract hog growers in the county/area on tax records, I see a lot of LLCs, at least as property owners, (do not know what entity operates them, but with  the level of difficulty I have had some days getting MBLLC's staff to differentiate between our two, I'd say not very many) so I am not alone in this organizational choice. 

Like you said, I am happy.  See no real reasons to change...and I am sure my CPA is not lazy.  Thanks for the time in explanation, though. 

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