Proposal Would Reinstate Form 1099 Exemption

What would this legislation mean for churches?

Church Finance Today

Proposal Would Reinstate Form 1099 Exemption

What would this legislation mean for churches?

Section 6041 of the tax code requires all persons or entities engaged in a trade or business who make payments to a “non-employee” in any year of $600 or more in the course of that trade or business to report the income to the IRS on Form 1099-MISC. This reporting requirement is designed to improve tax compliance based on the assumption that payees are more likely to correctly report their taxable income if they realize that payors are reporting that income to the IRS.

The income tax regulations specify that “all persons engaged in a trade or business” includes not only for-profit organizations, but also nonprofit and tax-exempt organizations. Treas. Reg. 1.6041-1(b)(1).

Payments made to corporations are exempt from this reporting requirement.

The Patient Protection and Affordable Care Act (part of last year’s healthcare reform legislation) made two significant amendments to section 6041. Both take effect for payments after December 31, 2011:

First, a Form 1099-MISC must be issued to corporations that are paid $600 or more during the year in the course of the payor’s trade or business (with a copy going to the IRS). Exempted from this requirement are payments made to tax-exempt corporations.

Second, all persons engaged in a trade or business (including nonprofit organizations) are required to report to the IRS payments aggregating $600 or more in a calendar year to a single payee for goods and certain services using tax form 1099.

These requirements generated a firestorm of controversy because of their extraordinary expansion of the Form 1099 reporting requirement. Many persons claimed that the new law would impose a crushing administrative burden on countless nonprofit and for-profit entities as a result of the obligation to file billions of new 1099 forms. Read literally, the new law would require churches to issue a Form 1099 to any vendor from whom it purchased goods or services of $600 or more during the year.

Previous attempts to repeal these expanded reporting requirements have failed. But that may soon change. Senate Finance Committee Chairman Max Baucus (D-Mont.) and Senate Majority Leader Harry Reid (D-Nev.) have introduced (and pledged to pass) a bipartisan bill that would repeal the new reporting requirements. The name of their bill is the Small Business Paperwork Mandate Elimination Act of 2011. “We have heard small businesses loud and clear and are responding to their concerns,” Baucus said.

“Small businesses … told us the 1099 provision was burdensome, and we are responding quickly to ensure that they can keep running smoothly,” Reid said. “Making it easier for small businesses to thrive should be something Republicans and Democrats can agree on. I hope we can come together on common-sense reforms like this.”

Key point. It is important for church leaders to be aware of the new reporting requirements beginning in 2012, since a failure to issue a Form 1099-MISC can result in penalties under sections 6721, 6722, and 6723 of the tax code.

Example. In 2011, a church hires a local landscaping contractor to provide landscaping services for an annual fee of $5,000. The contractor is unincorporated and self-employed. The church is required to issue the contractor a Form 1099-MISC reporting the compensation paid to him. It sends a copy of the Form 1099-MISC to the IRS.

Example. Same facts as the previous example, except that the contractor is incorporated. The church is not required to issue a Form 1040-MISC to a corporation since it is assumed that the corporation will issue the appropriate form (W-2 or 1099) to the contractor.

Example. Same facts as the previous example, except that the year is 2012. Unless Congress changes the law, the church is required to issue a Form 1099-MISC to the contractor, even though he is incorporated, with a copy going to the IRS.

Example. A self-employed, incorporated evangelist conducts religious services at a church on two occasions during 2012, and is paid $500 on each occasion. The church also reimburses the evangelist’s substantiated travel expenses under its accountable reimbursement plan. The church is not required to issue a Form 1040-MISC to the evangelist even though he is incorporated, since the health care reform legislation exempts payments to tax-exempt corporations from the Form 1099-MISC reporting requirement. It is a good practice for churches to confirm an evangelist’s representation that he or she is a tax-exempt corporation. This is easily done by (1) checking with the secretary of state’s office in the state in which the evangelist is allegedly incorporated to confirm nonprofit corporate status (in most states this can be done on the secretary of state website), and (2) confirming that the corporation is tax-exempt by searching the online directory of tax-exempt organizations (publication 78) on the IRS website.

Example. In 2012, a church purchased $2,000 worth of goods from a local Walmart. Unless the expanded reporting requirement is repealed, the church will be required to issue a 2012 Form 1099-MISC to Walmart, and every other vendor from whom it purchased goods or services of $600 or more during the year. Compensation paid to tax-exempt corporations is exempt from the reporting requirement.

Any developments will be reported in future editions of Church Finance Today.

This article first appeared in Church Finance Today, April 2011.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

This content is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. "From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations." Due to the nature of the U.S. legal system, laws and regulations constantly change. The editors encourage readers to carefully search the site for all content related to the topic of interest and consult qualified local counsel to verify the status of specific statutes, laws, regulations, and precedential court holdings.

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