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2010 tax changes

New 1099 reporting rules may be repealed

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The recent health care reform legislation included a new reporting requirement for businesses. Beginning in 2012, a Form 1099 must be filed with the IRS for payments of $600 or more made to corporations. Previous law required such reporting only for amounts of $600 or more paid to unincorporated businesses.

The “Small Business Jobs Act of 2010” added another reporting requirement, this one to take effect January 1, 2011. Landlords will be required to file Forms 1099 with the IRS for payments of $600 or more made for rental property expenses.

Responding to the complaints from businesses that these new reporting requirements would be very burdensome, Senate Finance Committee Chairman Max Baucus has announced legislation that would repeal both of these provisions.

Stay tuned to see if repeal will actually happen. If it doesn’t, get your business ready for these new requirements.

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Information reporting rules don’t change for 2010

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You’ve probably been hearing about changes to Forms 1099 for purchases of goods, payments to corporations, real estate rentals, and credit card transactions.

Are you wondering how your business will be affected? The first thing to know is that none of the new rules apply to the 2010 Forms 1099 you will file in January 2011. As in prior years, you’ll report payments to independent contractors and other vendors totaling $600 or more.

Reportable payments generally include amounts you pay for services in the course of your business, such as contract labor or bookkeeping. For 2010 returns, there’s no need to send Forms 1099 to corporations with which you do business. Exceptions to this rule include payments you make for certain medical or legal costs.

You can continue to use Form W-9, “Request for Taxpayer Identification Number and Certification,” to gather the name, mailing address, and identification number of vendors. Keep the completed Form W-9 with your tax records.

In cases when a vendor fails to provide an identification number, the rate you’ll use to withhold federal income tax – known as backup withholding – remains at 28%.

One change that takes effect this year is increased penalties. For example, the penalty for failing to file correct information returns can be as much as $100 per Form 1099.

Information reporting requirements continue to expand, with new rules for real estate rental expenses and credit card transactions applying to payments made during 2011.

We’ll keep you updated. Please call if you have questions.

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Act fast if you want to cut your 2010 taxes

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1. Tax rates are likely to go higher in 2011, so you might benefit from shifting income into 2010 and delaying deductions until 2011. It’s always a matter of personal circumstances, so analyze the two-year results of shifting income and deductions before you do anything.

2. Remember that required minimum distributions from retirement plans are back this year. If you’re over 70½, your 2010 distribution must be taken by December 31 or a 50% penalty may apply. If you turn 70½ this year, you could wait until April 1, 2011, to take your first distribution. In deciding, consider the likelihood of higher tax rates next year and the fact that a delay means you’ll have two taxable distributions for 2011.

3. With the $100,000 income limit dropped for converting a traditional IRA to a Roth, consider doing a conversion before year-end. You can elect to pay the tax over two years’ tax returns, 2011 and 2012, or pay in full on your 2010 return.

4. Consider buying needed equipment for your business to benefit from the first-year $500,000 expensing option and 50% bonus depreciation.

5. If you’re planning to add employees soon, do so before January 1, 2011. If you hire someone who has been unemployed for a while, you might qualify for an exemption from social security payroll taxes on the new hire’s wages. Keep the new worker for at least a year and you could also qualify for a tax credit of up to $1,000.

6. Start a pension plan for your small business. You may be entitled to a credit of up to $500 in each of the plan’s first three years.

7. Review your portfolio and start thinking about offsetting gains and losses for the year. You can deduct $3,000 of losses against ordinary income.

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