April 15, 2011

How Potential Tax Law Changes May Impact Food Entrepreneurs

Since it’s tax day here in the US and hopefully you already have your taxes posted for the year (if you don’t, why are you reading this – get to work!) I thought it made sense to focus on some upcoming tax law changes that are set to take effect in 2012.   The big one that has small businesses around the country worried are the proposed changes to 1099 reporting.

First and foremost, the way the law is currently written for this year, business are required to file 1099-MISC for any nonemployee entities who they pay more than $600 to in one calendar year such as, but not necessarily limited to, lawyers, consultants, graphic artists, web designers, and others who are either ‘individuals’ (ie, not a business) or set up as a sole proprietor or LLC.  1099-MISC also need to be filed for any rent paid for office space, equipment, machinery, etc in connection with your business.   Thus far this has been a fairly painless task and simply requires businesses to collect either the social security number or the business tax ID as well as the current address of the party with whom they conduct business in order to fill out the forms and send them in to the appropriate tax departments.

With the passing of the new health care laws last year though, there was a little rider on one of the bills that has businesses up in arms.   The new law – which is set to take effect in 2012, requires all businesses to file 1099’s for any purchases over $600 they make in a year regardless of whom they purchase from and the business status of that organization.  So, for example, that means that if you purchase more than $600 worth of ingredients from a large corporate entity like CostCo in the course of the year you will now be required to file a 1099 for CostCo.

Since news of this new law first hit the small business circuit, people have been up in arms and some changes have already been made.  While the law has not been repealed (which is what many were hoping for) a concession has now been made that any services you pay for with a credit card or PayPal are not required to have a 1099 filed as Congress apparently thinks that between your record keeping, the other company’s record keeping, and the credit card there’s enough of a record to make sure that everyone accurately reports their own earnings (as this really is all about raising tax revenue and Congress believes that by forcing all of these 1099’s it will force some smaller companies who typically fly under the radar to “come clean” about how much they really make and pay what they actually owe to the IRS).

Small businesses however argue that even with these concessions, collecting all of the information necessary to file all of these 1099’s is going to be an incredible timesuck as will the preparation of all of these 1099’s during tax time.

In all honesty, given that most accounting software formats 1099s for you fairly easily, I have to disagree that filing all the 1099’s will be too timeconsuming for small businesses and put an undue burden on them.  However, I do worry that the necessity of collecting all the information from businesses will result in one of two things.  It may cause small businesses to limit how many vendors they purchase from in order to limit the associated headache, or it may put a limit on how much any one small business will buy for another so as to stay under the $600 limit – especially when we’re talking about things like farmers market booths which may not be set up to take credit cards.  At the same time, as a small business that does a fair amount of wholesale business, I worry that my retailers may decide to limit the number of vendors they work with and does that have the potential to cut me out of the loop and cause a lose of business?

What do you think?  Are you worried about these impending changes?  Why or why not and what impact do you see them having (or not having) on your small food business?