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CORPORATE TAX INFORMATION REPORTING REqUIREMENTS

Corporate Tax Information Reporting Requirements Significantly Expanded Under the Recently Passed Patient Protection and Affordable Care Act

tax & accounting

On March 23, 2010, we witnessed an unprecedented expansion of Form 1099-MISC reporting requirements with the passage of the Patient Protection and Affordable Care Act. The law incorporates significant changes relative to 1099 reporting.

As amendments to Section 6041 of the tax code, these sweeping changes apply to payments made January 1, 2012 and after.

As discussed by COKALA Tax Group in their March 22 Bulletin:

Relative to the elimination of the •“corporate exception”: All corporations are reportable payees under Sec. 6041, except for corporations that are tax-exempt under I.R.C. section 501(a). Previously, the only corporations that had to be issued a 1099-MISC were those providing legal services, and those providing medical or health care services.

Payments “in consideration for property” •

require reporting on Form 1099-MISC if the aggregate total paid to a reportable payee for the calendar year is at or above the $600 threshold. We anticipate that real estate will be excluded from this reporting requirement when regulations are issued, but payments for tangible property will be reportable, including items you currently classify as goods, supplies, equipment, merchandise, inventory, materials, and so forth.

“Gross proceeds” payments are reported on Form 1099-MISC. •Previously, “gross proceeds” was a term chiefly associated with a different section of the tax code, and the only gross proceeds specifically reportable on the 1099-MISC were those reported in box 14 to an attorney or law firm that provided services to someone other than the payer. New regulations are needed to define this “gross proceeds” requirement.

For example, should it apply to claims payments for property •damage which, prior to this amendment, have not been reportable because they were not a fixed or determinable gain to the property owner? Should it be defined to make expense reimbursements specifically includible in the total reported as payments for nonemployee services?

Thomson Reuters ONESOURCE 1099 keeps you in compliance with the latest changes in tax information reporting.

Some are fearful that this law will even make gross proceeds from sales of securities (usually covered under IRC Sec. 6045 on Form 1099-B) reportable when paid to corporations.

There is an exception to the new reporting requirements for amounts reportable under other Code sections, but limited specifically to events where reporting is actually required.

Since corporations, apart from S corporations, remain exempt from 1099-B reporting, gross proceeds may now be reportable when paid to corporations under this new version of IRC Sec. 6041.

Securities are intangible "property". The IRS has indicated that the new provisions are to be far reaching, but there is no firm indication yet on just how far reaching, which will depend upon where the IRS takes us in the related regulations yet to be developed.

A congressional Joint Committee on Taxation technical document indicated that the provision was not intended to override specific provisions elsewhere in the Code that exempt certain payments from being reported, such as certain securities or broker transactions as defined under Sec. 6045(a) and the regulations thereunder. (Cokala Tax Information Reporting Solutions, LLC, federal tax bulletin, March 22, 2010, used with permission.)

ThOMSON REUTERS OBSERvATIONS

Relative to the elimination of the corporate reporting exception, Thomson Reuters indicates the 2010 health Care Act provides that, notwithstanding any IRS regulations issued before March 23, 2010, for information reporting purposes, “person” includes any corporation that is not exempt from tax under Code Sec. 501(a), see FTC 2d/Fin D-4001; USTR 5014; TaxDesk 670,501; . (Code Sec. 6041(h) as amended by 2010 health Care Act §9006(a))

A business is required to file an information return for all payments aggregating $600 or more in a calendar year to a single payee (other than a payee that is a tax-exempt corporation),

notwithstanding any reg promulgated before March 23, 2010. (Com Rept, see 5021)

RIA observation: • Congress apparently wants to ensure that payments made by persons engaged in a trade or business, to a corporation other than a tax-exempt corporation, of $600 or more in the aggregate in one tax year, will be reported to IRS if made in 2012 or thereafter. This will flag the payment for IRS, to help determine if it was properly reported by the corporate payee.

RIA illustration 1:• R, a calendar-year taxpayer, is engaged in the trade or business of being a florist. In 2011, R pays D Corp., a calendar-year taxpayer, $12,000 to rent a storefront to conduct the florist business. R is not required to file an information reporting return with IRS for the $12,000 payment made to D.

RIA illustration 2:• The facts are the same as in Example 1, except that R pays the $12,000 rent to D in 2013. R will be required to file an information reporting return with IRS for the $12,000 payment, setting forth the amount paid ($12,000) and D's name and address. R will also be required to provide D with a statement showing the $12,000 payment and include R's contact information. IRS will thus be on notice that R paid D $12,000 in 2013, and can check D's 2013 return to see if D properly reported the rent payment as income.

Because of the corporate exception being in place for many years you may not have valid corporate payee names and TINs maintained. To avoid any unnecessary backup withholding situations and to establish a reasonable cause for future penalty waivers or abatement, you will want to obtain this information well in advance of the January 2012 effective date.

Thomson Reuters ONESOURCE 1099 helps you better understand new IRS regulations that affect your organization.

RIA observation: • This information-reporting provision will increase the paperwork burden on businesses that routinely make payments each year totaling $600 or more per corporation.

RIA observation: • Presumably, businesses will be able to use Form 1099-MISC to report the payments discussed above.

REGULATIONS AUThORIZED

Under ThE 2010 health Care Act, the IRS can prescribe regulations and other guidance as may be appropriate or necessary to carry out the purposes of the information reporting rules, including rules to prevent duplicative reporting of transactions. (Code Sec. 6041(i) )

RIA observation: • Duplicative reporting could occur if a payment triggered information reporting under pre-2010 health Care Act Regulations and also triggers the 2010 health Care Act information reporting provision.

RIA illustration 3: • B, a dog groomer, pays E's law firm, E Corp., $100,000 in 2012 to defend a lawsuit a customer brings against B. B will have to report the payment because (1) it is a payment of attorney's fees (as discussed above), and (2) under the 2010 health Care Act, it is being made to a non-tax-exempt corporation.

RIA observation: • Presumably, the IRS will issue guidance that will require B to report the payment just once.

For additional categories of payments made after December 31, 2011 for which information reporting will be required, see 1107 .

Effective: Payments made after December 31, 2011. (2010 health Care Act §9006(c))

PAYMENTS IN CONSIDERATION FOR PROPERTY

Relative to information reporting added for a trade or business payor of $600 or more

in gross proceeds to a payee after 2011, Thomson Reuters indicates “amounts in consideration for property” (Code Sec. 6041(a) as amended by the 2010 health Care Act §9006(b)(1)) and “gross proceeds” (Code Sec. 6041(a) as amended by the 2010 health Care Act §9006(b)(2)) to the pre-2010 health Care Act categories of payments for which an information return to IRS will be required if the $600 aggregate payment threshold (described above) is met in a tax year for any one payee.

Congress says that for payments made after 2011, the term “payments” includes gross proceeds paid in consideration for property or services. (Com Rept, see 5021)

The information return will have to set forth the amount of the gross proceeds described in Code Sec. 6041(a) . (Code Sec. 6041(a) as amended by 2010 health Care Act §9006(b)(3))

RIA observation: • The term “gross proceeds” is not defined under the 2010 health Care Act for this purpose.

RIA observation:• Presumably, congress intended to ensure that payments made by persons engaged in a trade or business made in consideration of property in excess of $600 in the aggregate to a payee in one tax year will be reported to IRS if made in 2012 or thereafter. This would flag the payment for IRS to help determine if it was properly reported by the payee.

RIA illustration 1: X Corp., a calendar-year taxpayer, is engaged •in the trade or business of manufacturing. X purchases a used automobile from Y, an individual, for $1,000 in 2010. The $1,000 is an amount paid in consideration of property. X is not required to file an information reporting return with IRS for the $1,000 payment made to Y.

RIA illustration 2: The facts are the same as in Example 1, except •that X buys the automobile from Y in 2012. Y's adjusted basis in the automobile is $500. X will be required to file an information return with IRS for the $1,000 payment of gross proceeds, setting forth the amount paid ($1,000), regardless of the fact that Y's gain on the sale is only $500.

RIA observation:• It isn't certain whether payors will be able to use Form 1099-MISC, Miscellaneous Income, for the required reporting, or need to use some other form.

For an information reporting requirement for payments made to corporations, see 1108.

Thomson Reuters ONESOURCE 1099 helps you better understand new IRS regulations that affect your organization.

For IRS's ability to issue regs and other guidance under Code Sec. 6041 , see ¶1108 .

Effective: Payments made after Dec. 31, 2011. (2010 health Care Act §9006(c))

WhAT STEPS CAN I TAKE NEXT TO hELP ME WITh ThIS NEW PROCESS?

Because of the corporate exception being in place for many years, you may not have valid corporate payee names and TINs maintained.

To avoid any unnecessary backup withholding situations and to establish a reasonable cause for future penalty waivers or abatement, you will want to obtain this information well in advance of the January 2012 effective date.

Thomson Reuters can help you with the following actions, in partnership with Cokala Tax Information Reporting Solutions, LLC, for tax technical review:

Analyze account information to determine •if corporate payee information needs to be acquired or verified.

Plan for any W-9 distributions where •necessary.

Consider and size your budgetary needs •relative to printing and distribution, as well as alternative electronic methods of distributing information.

Determine a payee status. Is the •corporation a charitable, government, or otherwise exempt organization?

Determine if the increase in the number •of forms being filed will push you into a mandatory electronic filing requirement, if you are not already in that position.

Please Note: Though we are fast approaching a time where paper filing is no longer an option, for federal purposes, similar volume requirements may still require paper filing with various states.

Understand the increased penalties for late •or incorrect information return reporting/filing that are awaiting action by Congress and be familiar with the steps you must take to avoid them.

ThE ONESOURCE TAX INFORMATION REPORTING SOLUTION

ONESOURCE 1099 keeps you in compliance with the latest changes in federal and state reporting. Using the ONESOURCE 1099 solution, our web based software will automatically analyze and identify your reporting requirements based on your company’s data. You can elect to satisfy all or none (or any amount in between) of the reporting requirements identified by ONESOURCE 1099.

We produce files in the proper format for filing with each jurisdiction, along with necessary labels and transmittal letters where required. Whether the filing requirement is paper, disk, or electronic ONESOURCE 1099 produces what you need to be in compliance.

REDUCE COSTS

The cost of tax compliance can be high when the hiring of expert personnel, tax research subscriptions, training, consulting expenses and seminars are considered in their entirety. ONESOURCE 1099 can greatly reduce the need for these costs. The resources at Thomson Reuters, coupled with the technical resources of our partners, are there to keep you in compliance with the latest information return processing requirements.

REDUCE RISKS

The potential costs associated with noncompliance can be quite significant. The new law changes provide for steep increases in penalties for 1099 and 1042-S forms. If your company processes a large number of these forms, the costs can become mind-boggling. ONESOURCE 1099 identifies your reporting requirements and produces the information you need to stay in compliance

FREE UP RESOURCES

ONESOURCE 1099 utilizes the abundant tax resources of Thomson Reuters to keep current of changes in tax information reporting, so you don’t have to. leaving you more time to focus on the true needs of your business.

CONTACT US

For more information on how we can assist you in meeting all of your 1099 reporting needs, contact Rich McGrath , ONESOURCE 1099 National Sales Director at: rich.mcgrath@thomsonreuters.com

Or visit us on the web at:

www.onesource.thomsonreuters.com/1099

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