Forums: Discussions for entrepreneurs and small business.

As you may have heard, a few new rules and regulations for businesses and corporations passed through Congress with the Health Care Reform bill.  If that doesn't ring any bells yet, let us add that the changes will apply to the 1099 forms, a topic that has whipped most business owners and the financial media into frenzy.  The government needs to raise money for the health care reform itself, as well as for all the tax credits that businesses will receive from the bill.  They have decided to do this by concentrating on the unreported income that the IRS misses every year.
 
Unreported or underreported income might seem like a rather small pool from which to pull such large funds.  The numbers, however, are shocking.  It is estimated that around 300 billion dollars are lost every year in unreported income.
 
These new rules are supposed to make it more difficult to hide income from the IRS. On the surface, this looks like a perfect way to solve two problems at once. But there are a few downsides to the new regulations. Here are some:
 
Business owners will see an increase in the amount of record keeping they will need to do. They will have to keep track of addresses and Tax Identification Numbers (TINs) for all vendors who they pay, and make sure those they buy from have their information. We suspect that sales companies will see the biggest change in their records.

Since 1099-MISC will start to be used for tangible goods, business owners who sell products to other businesses will also carry a new bookkeeping burden. Let's say there is a company that sells shampoo, and they sell their shampoo to a specialty hair salon, one that also sells products. If the hair salon spends more than $600 in a calendar year with the shampoo distributors, then they will need to report their payments to the shampoo distributors. 

When you talk about two private business owners trying to balance their yearly books, an obvious problem arises. Continuing with the above hypothetical situation, what if the shampoo distributor's books and the salon owner's books did not match? If the distributor says that the salon owner spent $700 in a calendar year, but the salon owner says she spent $550, then this could lead to conflicts between the business owners.
 
Our suggestion for all active business owners is to invest in a bookkeeper. This is especially important for anyone who has an S-Corp or a C-Corp; you will be getting 1099s for your business for the first time. Running a business is difficult enough without having to worry about bookkeeping, especially in this day and age. Often, even tax attorneys who run their own businesses make sure that they hire independent bookkeepers to keep records, since it's more cost effective in the long run.  Make sure that the bookkeeper that you choose keeps a record of the receipts, so that if your numbers do not match your customers' numbers, you and your bookkeeper have proof.

 Business owners should also get vendors to complete IRS Form W-9 for their records. It is a basic identification form, one that will provide you with all the necessary information about your vendors. You're going to need this information come tax season, so why wait until after they've been paid to get their information? Trust us, your vendors won't mind taking their time once your check has been cashed.
 
There is some good news left. For instance, the bill itself does clarify that once the IRS has their hands on these rules, they can tinker with them to make them less, well, chaotic and confusing. Luckily, the IRS will actually be trying to make things easier to understand in this case, so once the rules have been adjusted, the changes will doubtlessly be easier to understand. The other good news is that the regulation will not take effect until 2012. This means that, if you're a smart business owner, you have two years to perfect a bookkeeping system. Start explaining to your vendors this year that you want to make sure your numbers match, and try out a bookkeeping service to make sure it's right for you. By the time 2012 rolls around, keeping track of your records and working with your bookkeeper will probably feel like second nature.

This is a huge issue that I feel many small business owners know nothing about.  I have a feeling things will get real interesting in a few years when the IRS wants to know why a business owner did not submit 1099's when they are required.

This is an excellent post for all small business owners.  Even if you don't get a bookkeeper and you want to handle your books yourself.  Take note, this is a REALLY BIG change from the way business has been handled before in regards to the IRS.

Nice post, great info.

We have written to all our Senators and Representatives to point out why the information is likely to be useless.   One example is that many of my clients pay the same vendors via checks some months and via credit cards other months in an effort to manage cash flow.  This will most likely result in the incorrect amounts being reported as the law exempts reporting payments made via credit cards.

If the true intent is to find unreported business income – then a reconciliation of cash deposits in the business bank accounts to the income reported is a much better indication.  Many small business clients – other than schedule C filers – already have to balance sheet reconciliation as part of the tax return so the additional reporting would be much less onerous.

In any case – this is one issue all business owners must take the time to address with their elected officials.