Saturday, August 7, 2010

The Issues with Income Reporting

If you have been following recent news related to reporting of income, then maybe you can skip this first paragraph. What's the deal? Part of the health bill passed back in March requires business to report to the IRS when they pay another business more than $600 in any year. This is done on Form 1099-MISC. So what changed? First, it now applies to purchase of supplies in addition to services. Second, it now applies to payments to corporations rather than just individuals and partnerships.

The Fort Worth Star Telegram just published an article addressing this. Their point was this is expected to close a $19 billion tax gap. What could possibly be wrong with collecting $19 billion of under-paid taxes each year? And the author rationalizes that business are tracking who they pay and how much anyway. So to require the software to spit out the Form 1099-MISC at the end of the year (something not all bookkeeping software currently does) should be no big deal.

Here is the issue: Many small businesses do not track all expenditures through an accounts payable module that tracks the vendors. We don't - we don't run accounts payable! We actually pay for products and services when we purchase them. The most common example is the purchase of office supplies from stores like Office Depot, Staples, Office Max, etc. (If you think $600 sounds like a lot of office supplies try pricing printer toner and replacement drums.) Can you imagine having to collect tax identification numbers from every store you buy from just in case you have to report it? I can just see me asking the young clerk behind the register what the tax id number for the business is....

One change since the initial bill already made is to exempt payments made by credit cards. That will help if you always pay by credit card. But now not only do businesses need to track which business they purchased from, but how they paid.

I'll agree that $19 billion is a bit more than chump change, but it certainly would help if they also put into place the requirements to make the task manageable.

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