New 1099 Rules: President's Speech Offers Hope for Some Relief; Exceptions for Rental Income Reporting Remain Vague

For small businesses that were dreading the thought of having to produce a Form 1099 for every payee to which they paid at least $600, President Barack Obama offered the prospect of relief in his State of the Union speech January 25 when he said, “We can start right now by correcting a flaw in the [health care] legislation that has placed an unnecessary bookkeeping burden on small businesses.”

The Patient Protection and Affordable Care Act, P.L. 111-148, caught many by surprise when it became known after passage that payments to corporations are no longer exempt from information reporting requirements after 2011 and that 1099s would be required for purchases of goods as well as payments for services. The IRS National Taxpayer Advocate estimated that the new rules affect approximately 40 million businesses (including 26 million sole proprietors) and other entities, which will have to issue a Form 1099 for everyday transactions, such as purchase of a printer from an office supply store if it costs at least $600.

Efforts to repeal the expanded Form 1099 reporting requirements failed during Congress’ lame-duck session at the end of 2010. However, on the same day as the State of the Union address, two bills were introduced in the Senate that would repeal the section of the Patient Protection Act that enacted the expanded 1099 requirements (both titled the Small Business Paperwork Mandate Elimination Act of 2011). Sens. Max Baucus, D-Mont., and Harry Reid, D-Nev., introduced S. 72, which would repeal the requirement without any revenue offset. Sens. Mike Johanns, R-Neb., and Joe Manchin, D-W.Va., introduced S. 18, which would offset the costs of repeal by rescinding $39 billion in unspecified discretionary federal spending.

But relief for those who will have to comply with a close cousin of that rule—another new law requiring rental income recipients to issue 1099s for total payments of $600 or more to service providers—is less clear. That law applies to all payments made in 2011, and, starting January 1, 2012, it will expand to include payments for goods or services to individuals and entities such as corporations. See “New Rules Require Rental Property Owners to Issue 1099s.”

The AICPA is actively advocating that Congress repeal both 1099 laws and has also asked the Treasury Department to issue guidance as soon as possible to clarify which taxpayers are exempt from the rental payment requirement. Currently, the law exempts individuals when substantially all of the rental income is due to renting their primary residence on a temporary basis (such as members of the military and intelligence employees); individuals who receive rental income less than a minimal amount (the amount has not been set); and anyone for whom the requirements would create a hardship (not yet defined).

In a letter to the Treasury Department’s acting tax legislative counsel, AICPA Tax Executive Committee Chair Patricia Thompson said more specifics are needed, particularly to determine when the law relates to the taxpayer’s primary residence. For example, will someone who pays a plumber in January be required to report the payment even though the property was not rented until March?

Thompson recommended that the IRS and Treasury Department:

  • Provide a method for allowing taxpayers to directly file the information returns on the IRS’ website;
  • Establish a grace period of six months to a year before taxpayers become subject to any penalties to allow time for them to become aware of the requirements; and
  • Defer any requirement to e-file information returns relating to rental property expense payments for at least one year.

In requesting a grace period, Thompson pointed out that many taxpayers are not likely to be aware of the law until they consult with a practitioner, which may be after the January 31 deadline to provide a 1099 to the provider: “The AICPA thinks the penalties, if any, should be imposed on service providers who have failed to properly report all of their income as opposed to good faith taxpayers receiving rental income who were unaware of the new filing requirements and early deadlines.”

Tax Insider Articles


Business meal deductions after the TCJA

This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction.


Quirks spurred by COVID-19 tax relief

This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19.