Tag Archive | "IRS"

A Brief History of Reinsurance


Successful reinsurance companies generate untold wealth for dealers and agents today. In the second decade of the 21st century, reinsurance has long been established as a mature, legally compliant and vital tool for helping reinsurance company owners achieve additional security and long-term prosperity.

Throughout the years, there were occasions when my company, SouthwestRe, played an important role in helping to guide the industry through some rather tumultuous times, as we and other companies sought to establish reinsurance as a legally viable program that would stand muster under intense IRS scrutiny.

Wright vs. Commissioner

Starting off on a rather negative note, one of the defining events in the history of reinsurance as it pertains to our industry occurred in 1993, with the “Wright vs. Commissioner” tax case. The reinsurance business was fairly virgin territory at the time, and unfortunately, the IRS decided that some Producer-Owned Reinsurance Company (PORC) owners were abusing the system. As a result, the IRS brought suit against a West Coast dealer and PORC owner named William Wright, treating it as a landmark case that could ultimately eliminate PORCs going forward.

The IRS won their case against Wright, with the court ruling that transactions between the dealership and the PORC were “sham” transactions, and that the PORC’s corporate form should be disregarded and its income deemed as being received by the owner of the dealership. In the end, the cost to the dealer was nearly $8 million dollars. To say this ruling “shook up” our industry would be an understatement.

The following year, the Consumer Credit Insurance Association (now Consumer Credit Industry Association), or CCIA, held their first reinsurance task force meeting. (As owner of SouthwestRe, I was a member of that task force.) The CCIA met to discuss the implications of the Wright case and other issues, and in response helped establish a plan of action for our industry going forward. The key positive result of this meeting was the establishment of the “dos and don’ts” of reinsurance structure and management that exist to this day.

Turks & Caicos

Another negative that was turned into a positive occurred in 1993. From nearly the beginning, the Turks & Caicos Islands (TCI) were the domicile of choice for our industry. An article was published that year in an industry newsletter that was extremely negative about TCI. Pressure built to leave TCI because of perceived problems with their government’s regulatory standards. Some companies succumbed to the pressure, and moved to other domiciles. Most companies realized that the criticism was unfounded and maintained their presence in the Turks & Caicos. Ultimately, the prediction of impending doom as portrayed by some did not come true, and now over twenty years later, TCI remains a healthy and viable domicile of choice.

Vehicle Service Contracts

The use of reinsurance in the beginning was mainly applied to credit insurance and a few other ancillary products. Over time, Vehicle Service Contracts (VSCs) became the dominant product. Also in the beginning, the only type of VSC was “Dealer Obligor” business. In 1992, the IRS took the position with Revenue Procedure 92-97 that Dealer Obligor business could not be deducted immediately, and had to be amortized over the life of the VSC. This was totally unrelated to reinsurance, and negatively impacted every dealership in the U.S. by creating a huge tax liability.

Fortunately, this was more-or-less rectified with the passage of IRS Revenue Procedure 92-98 (Service Warranty Income Method or SWIM), which mitigated most, but not all, of the negative consequences of Revenue Procedure 92-97.

This was a Godsend to the reinsurance industry from two perspectives. The first was that it took away the IRS’s argument that VSCs were not insurance and therefore couldn’t be reinsured as they had previously maintained. Secondly, this position was the beginning of “Administrator Obligor” legislation. This validated the entire reinsurance transaction, and started us on the path we are on today.

IRS & Administrators

Now we jump ahead a few years. Since the IRS wasn’t entirely successful with their insurance regulations for dealers, they decided to go after administrators instead. What wasn’t widely known at the time of the release of Revenue Procedure 92-97, was that the IRS was also trying to impose the same expense recognition principle on administrators (or “obligors”) as they had just done with dealers. In other words, if the automobile dealer could not deduct the premiums paid for the purchase of an insurance policy to cover the VSC, then by logical extension the IRS would not allow an Administrator to immediately deduct a similar premium payment. Clearly, this would have been devastating.

However, a very talented lawyer came to the rescue. Kirk Borchardt was retained by an administrator who was being audited by the IRS. Kirk took the position that if an administrator was taking premiums and paying premiums just like an insurance company, then it was in fact an insurance company. He made this argument to the Service in 1996 and the IRS agreed, releasing Technical Advice Memorandum (TAM) 9601001. This effectively allowed an administrator to be taxed as in insurer. TAM 9601001 was the progenitor of the “AO Model” that was first utilized over 15 years ago by SouthwestRe. And today, TAM 9601001 is the genesis of theory behind Dealer-Owned warranty companies.

It should be noted that Kirk Borchardt was also SouthwestRe’s lawyer at the time he helped establish TAM 9601001, and subsequently became the CEO of Dealers Assurance Company (DAC), our affiliated carrier. He was recently succeeded by Kristen Gruber. Fast-forward six years to 2002. Everything was going well in the Industry. Administrator obligor legislation was being adopted in most states, and the industry was growing dramatically because the private sector was making inroads on the manufacturer’s business. Profits were being made all around. And then…

The IRS issued Notice 2002-70, which stated that ownership of a PORC was a listed transaction. This didn’t have any tax implications, but created very negative implications from a perception (tax avoidance) standpoint. SouthwestRe took a proactive approach, and hosted an industry meeting to discuss the issues and determine a course of action to mitigate the negative implications of this IRS decision. A byproduct of this meeting was that SouthwestRe spoke with the IRS on behalf of the CCIA in Washington, D.C. in 2003, and pointed out the benefits of reinsurance to the producers of business, mainly the automobile dealers. This culminated in 2004 when the IRS issued Notice 2004-65, which repealed Notice 2002-70. PORCs were no longer a listed transaction, and it was back to business as usual. The IRS Commissioner at the time even admitted, “there were not the abuses we thought there were.”

That same year, Congress adopted new legislation in the form of HR 3108, which had positive implications to PORCs and the industry as a whole. While it did not change the way that business was being done, it did clarify the method of taxation for small casualty insurance companies. The result was the elimination of many gray areas in interpretation of the taxation of PORCs. Previously, practitioners were divided into two camps: one that used the 501(c)(15) legislation in addition to the 831(b)(2) portion of the IRC, and one that used 831(b)(2) only. With the release of HR 3108, the 501(c)(15) camp went to the sidelines, and the 831(b)(2) camp prevailed, and it is still recommended today.

Foreign Corporations

In 2013, the IRS again took a step that could have made ownership of PORCs problematic, depending upon one’s interpretation of their intent. As part of the Foreign Account Tax Compliance Act, or FATCA, the IRS issued Form 8938. This required owners of foreign investments to report their ownership on their tax return. The interpretation of who had to report brought about some differences of opinion among Industry professionals. However, we understood that the IRS’s target was not PORCs, but actually foreign investments on which U.S. citizens were not paying taxes on investment income.

Despite the fact that the IRS’s somewhat confusing instructions for Form 8938 were being interpreted to say that it applied to 953(d) electing companies, SouthwestRe took the somewhat controversial position that 953(d) electing companies did not have to report their ownership. We held the position that once clients made the election for their reinsurance company to be taxed as a U.S. corporation, their company was no longer a “foreign” corporation. Although our interpretation put us in the minority, we were later vindicated when the IRS revised their instructions to make the intent of Form 8938 clear. As a side benefit, we also saved our clients from increased scrutiny.

Going Forward

So what about today? Despite the many hurdles and potential crises we’ve all encountered throughout the years, SouthwestRe and companies like ours have endured and will continue to endure. The business is mature, law abiding, and profitable for reinsurance company owners. It is possible, however unlikely, that additional IRS rulings may come our way in the future that attempt to throw up roadblocks to our Industry. My feeling is, no matter what happens, reinsurance as it applies to our industry is here to stay. It’s a great business to be in, and I’m very proud to have been a part of its history.

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Risking a Health Insurance Strategy the I.R.S. May Not Approve


When it came time to renew his company’s health plan last fall, Jerry Eledge found himself in a bind that many small-business owners know all too well, reported The New York Times.

On one hand, “it’s kind of a moral obligation” to offer insurance, said Mr. Eledge, who runs Community Quick Care, a growing chain of primary health care clinics in the Nashville area. And yet, premiums for his existing plan were going up 20 percent, while other group plans promised as much as a 50 percent increase, even as deductibles and co-pays were becoming less generous. “We found no really good alternatives for 2014 at all,” he said. “Before Gary came along, we weren’t sure what we were going to do.”

Gary is Gary Adkins, an insurance agent in Brentwood, Tenn., who introduced Mr. Eledge to Zane Benefits, a company in Park City, Utah, that offers businesses an online claims reimbursement service. With help from Zane’s software, Mr. Eledge created a new health plan for Community Quick Care. The plan, known as a defined contribution plan, has obvious appeal.

It largely frees the company from the headaches of arranging health coverage by reimbursing employees for insurance they buy on their own. At the same time, it allows the company to help its employees find affordable, often cheaper, options on the individual market through Zane. And, importantly, it promises that the contribution the company makes to its employees’ coverage is tax-free for the employees and excluded from payroll taxes for the employer.

That, however, is a promise Zane Benefits may not be able to keep.

In a technical guidance issued last year and reiterated in May, the Internal Revenue Service issued a clear warning about such health reimbursement arrangements, according to eight health and tax lawyers as well a half-dozen lobbyists and analysts who have followed the Affordable Care Act’s adoption. The guidance “makes it very difficult, if not impossible, for an employer to pay for an employee’s individual insurance with tax-free dollars,” said Seth Perretta, a health and tax lawyer with the Groom Law Group in Washington.

The issue, at least on the surface, is language in the health law meant to make sure there are no dollar limits on the coverage for a person’s basic medical needs, which the law calls essential health benefits. The I.R.S. asserts that a plan reimbursing employees for insurance they buy on their own cannot comply with this prohibition on annual limits because the company’s contribution is by definition limited — even though the health insurance the employee ends up buying would have no annual limits.

The president of Zane Benefits, Rick Lindquist, 29, said Zane’s plan did not violate the prohibition on limits because premiums were not an essential health benefit. “We’ve designed an arrangement that takes into account the guidance, and complies with the statutes and regulations as written,” he said.

Before this year, most companies that wanted to make sure their employees had insurance had little choice but to select and manage the plans because they could not be certain their employees would be able to obtain insurance individually. Now, as the Affordable Care Act creates more options on the individual market, the question of whether to continue offering health insurance has intensified, especially for small businesses.

And Zane Benefits is emerging as the leader of a handful of companies — including TASC, HR Simplified and Freedom Services — hoping to facilitate that transition. According to Mr. Lindquist, about 2,600 small businesses use Zane’s software to create and manage health reimbursement arrangements, as these plans are commonly called — lured at least in part by the tax exclusion. Community Quick Care pays Zane $12 a month for each of its 30 employees to administer the plan. Mr. Adkins estimates that employees can buy their own plan for as much as 40 percent less than the same coverage would cost as part of a group. Should they receive government subsidies to buy that insurance — and Mr. Eledge estimated up to a quarter of his employees qualify — the savings to the employer can double, Mr. Adkins said.

Lawyers following the issue called Zane’s approach risky at best. “It is abundantly clear that the I.R.S. thinks that you cannot use one of these arrangements to use tax-free dollars to pay for individual health insurance,” said Amy B. Monahan, a law professor at the University of Minnesota.

But Mr. Perretta said the Zane plan exploited a weakness in the guidance, which does not specify whether insurance premiums are an essential health benefit. “The Zane arrangement tries to thread a needle,” he said. “It really lives or dies on that ambiguity.” Elsewhere, he added, the I.R.S. and other agencies have implied that a premium is not an essential health benefit, so for now, Mr. Perretta said, the Zane plan could be legal, “but regulators don’t like it.”

Officials from the Treasury Department and the I.R.S. declined to answer questions about the regulations or Zane’s plan, but a Treasury Department official wrote in an emailed statement, “This type of reimbursement plan generally would fail to comply with the A.C.A.’s prohibition on annual dollar limits.”

Several lawyers who had spoken with I.R.S. officials said the Obama administration was concerned that self-insuring companies could use the plans to shift sicker workers to the individual market, which might destabilize it. Nor do regulators want employees with tax-preferred reimbursement accounts to also have access to exchange subsidies, which the lawyers said would constitute “double-dipping.” Because the tax-free benefit would not appear on an employee’s tax return, an exchange could not consider it when determining whether the employee’s income was low enough to qualify for a tax credit. As a result, employees receiving reimbursements could be treated more generously by an exchange than the law intends.

In fact, it is not clear that employees who sign up for Zane’s plan would be eligible for a subsidy. Zane said they would. All of the lawyers interviewed said they would not. Under the law, employers will report to the I.R.S. who has signed up for company health plans, including reimbursement arrangements. Beginning in 2016, the agency will use these employer statements to determine whether an individual who received a subsidy in the previous year was entitled to it — and if not, the employee will have to pay the government back. Said Linda Mendel, a tax lawyer with Vorys, Sater, Seymour and Pease: “There’ll be some nasty surprises when all this stuff comes together in 2016.”

The Treasury official said the government planned to issue further guidance on the matter. But ultimately, it may be up to one of Zane’s clients to persuade a court that the arrangements are legal. The penalty for an employer violating the market reform rules is $100 a day, or $36,500 a year, for each affected employee, though never more $500,000 total.

Mr. Lindquist said his agents walked clients through all of the legal risks, but he was confident the plan would withstand scrutiny. “If we were worried about that, we wouldn’t offer it,” he said. Mr. Adkins, the insurance agent, said he told his small-business clients who had adopted Zane’s software — there are 150 of them — that they had little to fear. “The purpose of the Affordable Care Act is to get people covered in this country,” he said. “Do you really believe the government is going to penalize that small-businessman $36,000 a year per employee because he had the heart to actually help his employees get as much coverage as they could get?”

And Mr. Eledge, of Community Quick Care, said Mr. Adkins satisfied him, and his accountant, that the plan would stand up. “We like it very clear that everything we do as a company is aboveboard and legal,” he said. “I’m not the kind of guy who says, ‘I.R.S., come get me.’ ”

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Audit Tips for Small Business Owners


There are several factors that can raise eyebrows at the IRS and trigger an audit, but knowledge is power, and understanding what agents are looking for in a return can help you avoid the hot seat.

The IRS website contains detailed information that taxpayers can tap into to eliminate–or at least minimize– the fear and dread that most people experience when dealing with the IRS. The site also provides the training tools used by auditors that can provide clues on what they are looking for in a return. Once you know agents’ mode of thinking, you can adequately prepare. In fact, if you own a small business, you want to organize your documentation so that you are always ready in the event of an audit.

The analysis of income plays a major role in tax returns, and techniques on how to document these figures properly to avoid any issues applies to every entity type: sole proprietorship, LLC, partnership, or corporation.

When it comes to income, auditors will first look at internal controls. The agent wants to know if you are keeping a decent set of books which tie out to your bank accounts and reflect your current lifestyle. To the IRS, a lack of internal controls signifies a potentially inaccurate reporting of income. Not having books or decent records is a major red flag. The auditor will dig in, possibly expanding the audit to cover every line item on the tax return or to include other open tax years. That can get expensive– not to mention stressful.

Tip No. 1: Maintain your books and records on computerized software and reconcile your bank accounts.

Auditors are trained to detect unreported bartering income. Remember that even if no money changes hands, you are required to report all bartering income, and the IRS knows this is an area of high noncompliance. It’s a tough economic climate right now, and many entrepreneurs turn to bartering to help protect cash flow.

Agents know to look for Forms 1099-B filed with the IRS, which report barter income, and they will look around your place of business for stickers or plaques that announce your participation in a bartering exchange club. They will check your website to see if you’ve listed a bartering exchange organization. While examining your books, agents will look for fees paid to bartering exchanges. And of course, an agent will straight up ask about your participation in bartering activities. Tell the truth, and take the knocks if you must. Remember, the agency has ways of finding out.

Tip No. 2: Make it a matter of course to record all bartering activity in your books at its fair market value.

Assigning income to other parties—such as another business that you own to reduce net operating losses in that company and avoid self-employment and income tax on the income can be a hairy issue. If the auditor goes through your contracts and finds one that appears to be unfulfilled (because the income was shifted), be ready to provide copies of tax returns for your other businesses for examination. Do I hear the popping sound of the can of worms being opened?

In the case of Lucas v. Earl, U.S.T.C. 496 (1930), the Supreme Court ruled that income is taxable to the one who earns it regardless of the fact that he may enter into a legally-binding agreement to have it paid to another.

Tip No.3: Don’t play games with the money. Keep your businesses separate from each other and record all income and expenses accordingly.

When looking at bank statements, an auditor will add up all the bank deposits for the year and compare them to your reported sales. If there is a discrepancy, the agent will want an explanation. Amounts deposited that exceed the amounts reported on a tax return will raise eyebrows, but there may be plausible explanations. You may have transferred personal funds into the business account to remedy a cash flow problem, or there may be deposits of other nontaxable income such as loan proceeds, or a cash gift from mom and dad.

Tip No. 4: Make sure you have an audit trail for all funds deposited to bank accounts that are not taxable income. Keep copies of cancelled checks of monies deposited with your bank statements to identify any transactions that do not represent sales.

When examining your income stream, the auditor will consider the doctrine of “Substance over Form.” In the case of Commissioner v. Court Holding Co., 324 U.S. 331 (1945) C.B. 58 it states, “How a transaction is taxed depends upon its substance. A transaction must be viewed as a whole, and each step from the beginning of negations to final consummation is relevant. The true nature of a transaction cannot be disguised by a mere outward appearance that exists solely to alter tax liabilities.”

Tip No. 5 – This again is an admonition to not play games with money. Every transaction you enter into should be for a purpose other than just making the tax code work to your benefit.

This article was written by Bonnie Lee and published in Foxbusiness.com.

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Making The Most At Tax Time


The business of America is small business. More than 99 percent of companies in this country are categorized as “small,” but their impact on the U.S. economy is huge. These businesses employ half the private workforce and have generated as many as 80 percent of new jobs annually in the course of the past 10 years.

As the IRS finally begins to accept itemized 1040 tax returns for last year, it’s worth taking a look back at the Small Business Jobs Act of 2010, passed by Congress and signed by President Barack Obama in September 2010.

The new law is the most significant tax break in years for entrepreneurs and small-business owners. For these critical, still-struggling players in the U.S. economy, the Act couldn’t be more timely, and smart small businesses should make sure to take advantage of some of the $12 billion in new tax benefits it put on the table.

Increased Section 179 expensing limits on machinery, equipment, software, and, for the first time, real estate, are among the most dramatic changes. The dollar limit on the expense deduction for 2010 and 2011 is $500,000, which is double what it otherwise would have been for 2010, and 20 times what it otherwise would have been for 2011 (although the deduction starts to phase out if investment exceeds $2 million, and phases out completely at $2.5 million). A company that had planned to deduct expenses at the previous limit of $250,000 for 2010 now can, within certain restrictions, deduct up to a quarter of a million dollars more.

It’s a big enough tax break that business owners should think carefully about how to maximize deductions for both 2010 and 2011. The new provisions for expensing up to $250,000 of “qualified real property” (within the overall $500,000 expense deduction limit) are more complicated than the rules for equipment expensing, but with the expertise of a tax pro, the savings can also be impressive. And remember that while the Section 179 expense deduction for any given year is limited to taxable income, any excess can be carried forward to succeeding tax years.

The Act is a multivitamin for startups. It continues 50 percent bonus depreciation, which was supposed to end in 2009, through September 8, 2010. (Under later legislation, new equipment, like computers or software, can be expensed at 100 percent of the cost if acquired and placed in service after September 8, 2010 and before 2012.) There’s also an $8,000 increase in the amount of first-year depreciation that can be deducted for new vehicles acquired and placed in service in a trade or business in 2010 (extended by later legislation through 2012). These are ways, as with the new expensing limits, to boost tax savings.

It’s also important to realize there is no capital gains tax on certain investments in qualified small-business stock held for more than five years. Additionally, entrepreneurs can deduct $10,000 of their startup costs (up from $5,000) when computing their 2010 taxes, including expenses for training, advertising, travel, and even market research. General business credits for eligible small businesses that previously could be carried back just one year to offset the previous year’s tax now can be carried back five years. And there’s more—like a deduction for health insurance costs when computing self-employment tax. Documentation for cell phone deductions has also been simplified. It can all add up very nicely for anyone trying to get a new business off the ground.

If you’ve been discouraged trying to get a small-business loan in the past several quarters, consider taking another shot at it. A $30 billion fund has been set up to encourage smaller banks (those with less than $10 billion in assets) to make loans to small businesses. Initially, banks could pay the government back as little as a 1 percent dividend on the money from the fund if they increase loans to small businesses by 10 percent.

There are some aspects of the Act not only to be aware of, but also to be wary of, especially in the area of accurate and timely filing of taxes. For information returns, failing to file, filing late, and “intentional disregard” will all be more heavily fined. Also, new Form 1099 reporting requirements resulting from the 2010 Health Care Act will mean major changes in how businesses report spending.

The U.S. economy cannot recover fully without small business. The 2010 Small Business Jobs Act is a recognition of that. The law put real money on the table. Smart businesses will be sure not to leave any of it behind when filing 2010 tax returns.

This article was written by Lesli S. Laffie and published by Portfolio.com.

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IRS Helps Small Business Claim Health Care Tax Credits


The United States Internal Revenue Service (IRS) has released its final guidance, including a one-page form and instructions, for employers eligible to claim the new small business health care tax credit for the 2010 tax year.

Included in the Affordable Care Act enacted in March this year, the IRS confirmed that the small business health care tax credit is designed to encourage both small businesses and small tax-exempt organizations to offer health insurance coverage to their employees for the first time or maintain coverage they already have, reported Tax-News.com.

The new guidance addresses small business questions about which firms qualify for the credit by clarifying that a broad range of employers meet the eligibility requirements, including small employers that cover their workers through insured multi-employer health and welfare plans, and employers that subsidize their employees’ health care costs through a broad range of contribution arrangements.

In general, the credit is available to small employers that pay at least half of the premiums for single health insurance coverage for their employees. It is specifically targeted to help small businesses and tax-exempt organizations that primarily employ moderate- and lower-income workers.

Small businesses can claim the credit in the period from 2010 to 2013, and for any two years after that. For the tax years 2010 to 2013, the maximum credit is 35 percent of premiums paid by eligible small businesses and 25 percent of premiums paid by eligible tax-exempt organizations. Beginning in 2014, the maximum tax credit will increase to 50 percent of premiums paid by eligible small business employers and 35% of premiums paid by eligible tax-exempt organizations.

The maximum credit goes to smaller employers – those with 10 or fewer full-time equivalent (FTE) employees – paying annual average wages of USD25,000 or less per year. The credit is completely phased out for employers that have 25 or more FTEs or that pay average wages of USD50,000 or more per year. Because the eligibility rules are based in part on the number of FTEs, not the number of employees, employers that use part-time workers may qualify even if they employ more than 25 individuals.

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New Tax Reporting Rules Leave IRS to Mop Up Congress’ Mess


NEW YORK – With a new mandate looming that will require business owners to file millions more tax forms, the Internal Revenue Service has begun the daunting process of figuring out how to turn the law’s sweeping demands into actual rules for taxpayers, CNNMoney.com reported.

The new regulations, which kick in at the start of 2012, require any taxpayer with business income to issue 1099 forms to all vendors from whom they purchased more than $600 of goods and services that year. That promises to launch a fusillade of new paperwork: An estimated 40 million taxpayers will be subject to the requirement, including 26 million who run sole proprietorships, according to a report released this week by National Taxpayer Advocate Nina Olson.

Olson’s office, which operates independently within the IRS, flagged the new reporting requirements as one of its priority issues for the next year. Like many who have delved into the details of the new rules, Olson is concerned about their far-reaching scope and potential unintended consequences.

“The new reporting burden, particularly as it falls on small businesses, may turn out to be disproportionate as compared with any resulting improvement in tax compliance,” the Taxpayer Advocate Service wrote in a report released this week.

The new rules are aimed at reducing the “tax gap” between what individuals and businesses owe and what they actually pay. The federal government misses out on estimated $300 billion each year from tax underpayment. The expanded reporting requirements, which Congress slipped into the landmark health care reform bill passed in March, are an attempt to create a paper trail of 1099s exposing business-to-business payments that might otherwise stay off the radar.

But the cost of that paper trail could swamp the small companies, sole proprietors freelancers forced to generate it. Pennsylvania business networking organization SMC Business Councils surveyed its members and found that they currently average 10 filings a year of 1099 forms. The new rules would push that average to more than 200 filings per year for a typical small business, the industry group estimates.

The IRS will have broad leeway to interpret the rules — and it’s already showing signs that it will look for ways to staunch the paperwork flood.

In a late May speech before the two payroll industry trade group, IRS Commissioner Douglas Shulman announced a major exception to the new rules: The IRS plans to exempt transactions made through credit and debit cards. A separate reporting requirement kicks in next year that will cover card transactions and help the IRS spot unreported payments made through those channels, “so there is no need for businesses to report them as well,” Shulman said. “Whenever a business uses a credit or debit card, there will be no new burden under the new law.”

How much of a sigh of relief you should breathe depends on what kind of purchases your business makes. Some big-ticket consumer items that are typically paid by card — airline tickets or hotel stays, for example — will be 1099-free. But SMC Business Councils President Tom Henschke, a vocal critic of the new law, estimates that exempting credit-card transactions would affect less than 10% of his members’ reporting requirements.

“Most of the small businesses out there that do small business [purchasing] don’t do it by credit card,” he said. “One of the reasons is the transaction cost is very high — 2 percent to 3 percent.”

Henschke thinks the main beneficiaries of the exemption are likely to be credit-card companies, which will gain an added hook to get small businesses to pay their fees. Nolan Newman, a Seattle CPA who specializes in small-business needs, says it’s certainly possible that card usage will rise as a result: “If I’m a small business and I use my credit card moderately, would I try to increase my volume with which I pay vendors with it? Maybe.”

Henschke foresees another unintended consequence of the new reporting provisions: that in order to cut down on tax forms to be filed, businesses will trim the number of vendors they do business with. “I’ve actually heard businesses talking about consolidating their purchases, going from 150, 200 vendors, down to less than 100,” he said. “That will most certainly lead to some small businesses being swept under the door.”

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