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New 1099 Reporting Requirements Repealed

May 20th, 2011

IN SUMMARY: On April 14, 2011, President Obama fully repealed the recently enacted 1099 reporting requirements. In effect, those reporting requirements (that would have been very burdensome to small business and landlords) have been fully repealed as if they were never enacted. In other words, the mess of rumors about sole proprietors issuing 1099’s to any business it paid more than $600 such as Costco and United Airlines has been laid to rest as a false alarm. Instead, the 1099 reporting requirements we have grown accustomed to remain intact and unchanged…for now.

IN DETAIL:Taxpayers got some good news in April 2011 when Congress passed, and President Obama, signed legislation to repeal expanded information reporting requirements. The Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 (P.L. 112-9) repealed expanded business information reporting requirements previously scheduled to take affect for payments made after December 31, 2011 and also repealed rental property expense reporting which was effective for payments made after December 31, 2010.

The two (now repealed) information reporting requirements were enacted by Congress in 2010. Both were intended to boost tax revenues. Research has shown that taxpayers are more likely to report their tax liabilities when they know that the same information has been provided to the IRS by a third party.

The Patient Protection and Affordable Care Act (PPACA) generally required all businesses, charities and state and local governments to file an information return (Form 1099) when they made annual purchases aggregating $600 or more to a single vendor, other than a tax-exempt vendor, for payments made after December 31, 2011. The PPACA also repealed the longstanding reporting exception for payments to a corporation. The IRS was planning to issue regulations on the expanded business information reporting requirements but repeal of them makes the regulations unnecessary.

The Small Business Jobs Act of 2010 required information reporting by landlords on certain rental property expense payments of $600 or more in conjunction with their rental properties made after December 31, 2010. The types of expenses contemplated by the 2010 Small Business Jobs Act were, for example, payments to craftspersons, such as electricians and roofers. Payments for professional services, such as to accountants, also would have been covered by the 2010 Small Business Act. Some landlords, however, were exempt from reporting. They included, but were not limited to, landlords who received only a nominal amount of rental income. The IRS also was planning to issue regulations but repeal of the rental property expense reporting requirement makes the regulations unnecessary.

Both of these provisions generated significant controversy after their enactment. Small businesses, in particular, complained that the requirements would be costly and burdensome. Businesses would have had to develop new systems to capture the required information. In some cases, the law would have required backup withholding.

Initially, it appeared that Congress preferred to reform rather than repeal the new reporting requirements. One proposal would have raised the reporting threshold from $600 to $5,000 and would have excluded some routine payments, such as office supplies, from reporting. Another proposal would have exempted all purchases made with a credit card from the reporting.

By early 2011, momentum had built in Congress for complete repeal of the two reporting requirements. On March 3, 2011, the House approved the 1099 Comprehensive Taxpayer Protection Act. The Senate approved the bill on April 5, 2011 and President Obama signed the bill into law on April 14, 2011. Passage of the bill means that the expanded information reporting requirements under the PPACA are repealed as if they had never been enacted. Likewise, rental property expense reporting under the 2010 Small Business Jobs Act is repealed as if it had never been enacted.

The 1099 Comprehensive Taxpayer Protection Act did not repeal some other new information reporting requirements. In particular, taxpayers need to take notice of three new information reporting requirements that are now in effect after having withstood campaigns to have them repealed since their enactment:

1. Health insurance benefits. The Patient Protection and Affordable Care Act of 2010 requires employers to report to their employees on Form W-2 the cost of employer-provided health insurance. This reporting requirement is optional for all employers in 2011, optional for small-employers only for 2012 and mandatory for all employers starting in 2013.
2. Broker reporting. The Emergency Economic Stabilization Act of 2008 expands Form 1099-B reporting to include the cost or other basis of stock and mutual fund shares sold or exchanged during the year. This reporting starts in 2011 for most stock acquisitions and in 2012 for most mutual fund transactions. The expanded form will also report whether gain or loss is long-term or short-term.
3. Payment card reporting. The Housing Tax Assistance Act of 2008 requires the reporting of various payment card transactions starting in 2011. Payment settlement entities are required to report payments made to merchants for goods and services in settlement of payment card and third-party payment network transactions.

Congress and the White House are currently negotiating a deficit reduction plan and a fiscal year (2012) federal budget. The deficit reduction plan and budget are expected to include a mix of revenue raisers and spending cuts. It is unlikely Congress will revive the two information reporting requirements repealed in April 2011 but lawmakers might impose other information reporting requirements. Speaking in Washington, D.C. in April 2011, IRS Commissioner Douglas Shulman endorsed making more use of information returns to increase taxpayer compliance. Shulman’s remarks may resonate with many members of Congress who are looking for ways to reduce the nation’s budget deficit.

If you have any questions about the 1099 Comprehensive Taxpayer Protection Act or information reporting in general, please contact our office.

Key Provisions of the 2010 Tax Relief Act – Signed Today

December 17th, 2010

There has been a lot of media attention regarding the 2010 Tax Relief Act signed into law today by President Obama. The following are major highlights of the new tax legislation:

Tax Rates
The income tax rates for individuals will stay at 10%, 15%, 25%, 28%, 33% and 35% (instead of moving to 15%, 28%, 31%, 36% and 39.6%) for 2011 and 2012.

Payroll Taxes
For 2011, there will be a two-percentage-point payroll/self-employment tax holiday for employees and self-employed individuals. As a result, employees will pay only 4.2% Social Security tax on wages and self-employed individuals will pay only 10.4% Social Security self-employment taxes on self-employment income up to the threshold.

Capital Gains and Qualified Dividends
For 2011 and 2012, long-term capital gains (with the exception of 28% rate gain and unrecaptured section 1250 gain) will continue to be taxed at a maximum rate of 15% (instead of 20%), and qualified dividends paid to individuals will be taxed at the same rates as long-term capital gains (instead of being taxed at the same rates that apply to ordinary income).

Standard Deduction For Married Taxpayers
The basic standard deduction for a married couple filing a joint return will remain twice the basic standard deduction for an unmarried individual filing a single return for 2011.

Itemized Deductions and Personal Exemptions
For 2011 and 2012, itemized deductions of higher-income taxpayers will not be reduced (instead of being reduced by 3% of adjusted gross income (“AGI”) above an inflation-adjusted figure, but the reduction couldn’t exceed 80%), and a higher-income taxpayer’s personal exemptions will not be phased out when AGI exceeds an inflation-adjusted threshold (instead of being phased out).

Alternative Minimum Tax (“AMT”)
The AMT exemption amounts for individuals for 2010 will be increased (instead of being lowered which would have resulted in more individual taxpayers having to pay the AMT).

Estate Tax Relief and Estate Planning
Until the new legislation, there was no estate tax or generation-skipping transfer tax (“GST”) in 2010. For 2011 and 2012, there will be lower estate taxes and GST by increasing the exemption amount to $5 million (instead of $1 million), and reducing the top rate to 35% (instead of 55%). Estates of decedents who died in 2010 can now choose between (1) applying an estate tax (based on a $5 million exemption and 35% top rate) with beneficiaries receiving a step-up in income tax basis for inherited assets or (2) not applying an estate tax with beneficiaries only receiving a modified carryover income tax basis for inherited assets. For gifts made after December 31, 2010, the gift tax is reunified with the estate tax, with an applicable exclusion amount of $5 million and a gift tax rate of 35%. The GST tax exemption for decedents dying or gifts made after December 31, 2009, is equal to the applicable exclusion amount for estate tax purposes, which is now $5 million for 2010. Although the GST is now applicable in 2010, the GST tax rate for transfers made during 2010 is 0%. Effective for estates of decedents dying after December 31, 2010, the executor of a deceased spouse’s estate can transfer any unused exemption amount to the surviving spouse.

Incentives for Businesses to Invest in Machinery and Equipment
Under the legislation, there is a 100% writeoff in the placed-in-service year of the cost of property eligible for bonus depreciation (this will apply for property acquired and placed in service after September 8, 2010, and before January 1, 2012), and a 50% bonus first-year depreciation allowance for property placed in service in 2012. The election to accelerate the AMT credit instead of claiming additional first-year depreciation has been extended through December 31, 2012. In addition, for tax years beginning after December 31, 2011, the maximum expensing amount under Code Section 179 will be $125,000 and the investment-based phaseout amount will be $500,000 (up from $25,000/$200,000). For 2010 and 2011, these amounts are $500,000/$2 million, respectively.

Tax Deal Proposal – A Five Bullet Summary

December 8th, 2010

As you may have heard, there is a major “Tax Deal” in the works. Here’s a very high level summary of what’s currently on the table:

- Bush-Era tax cuts remain in place for two years (i.e. no changes to income tax brackets)
- Capital gains rate stays at 15% for two years
- Estate Tax returns in 2011 with a top rate of 35% for net assets over $5.0 million
- A 2% payroll tax cut for employees from 6.2% to 4.2% (no cut for employers)
- Unemployment benefits extended for 13 months

We’ll keep you posted as the details unfold and something is signed into law.

Tax Planning for an Uncertain Future (our recent CSQ article)

December 7th, 2010

Smith & Wooton recently published a tax planning article in an executive lifestyle magazine. A link is provided below.

It has been well publicized that the Bush era tax cuts are scheduled to expire at the end of 2010. Most experts agree that the existing tax rates will be extended another one or two years (by the time you read this, Congress may have already acted to extend some of the tax cuts into 2011), but you would be hard- pressed to find any expert that thinks tax rates will go down in the near future….

Click the link below to read the full article:

Dec 1st…time to start blogging again.

December 1st, 2010

Smith & Wooton is gearing up for another exhilarating tax season. There are some very dramatic tax changes in the pipe right now and legislative decisions will be finalized by Congress over the next few days, weeks and months.

We will post the highlights of those changes to our blog, LinkedIn and Facebook. Taxes for every American citizen are scheduled to go up unless Congress acts before the end of the year.

Stay tuned…