Courtesy of the health care reform bill, every business in the country is about to undergo a dramatic change in how expenses are reported. These changes promise to be an accounting nightmare for virtually everyone.
A recent article in CNNMoney.com focuses on one provision of the health care bill. This simple change is designed to help close the estimated $300 billion gap between what individuals and businesses owe the Internal Revenue Service versus what they pay.
What the provision doesn’t address is the record-keeping and accounting costs that could far exceed the amount of revenue the bill will generate. The impact on the real estate industry could be profound.
Traditional 1099 tax forms are the mechanism for reporting non-wage income that can include commissions, mortgage interest paid, pension distributions and dividend income. Brokers typically issue 1099s to those who do contract work for their business, most notably their sales staff.
In 2008, Congress passed a new bill creating a 1099-K that goes into effect in 2011. This bill is designed to track non-wage income through credit cards. Credit-card companies will be required to send their clients and the IRS an annual form documenting the year’s transactions. The change will make it more difficult for those who sell their products or services using credit cards to hide their income.
According to the CNNMoney article: "The 1099-K is only required when a merchant has at least 200 payment transactions a year totaling more than $20,000. But it applies to all payment processors, including PayPal, Amazon.com, and others that service very small businesses."
While the 1099-K change will be the first one to kick in, the change that will have a huge impact on every business and virtually every real estate transaction will be the changes in the "1099-Misc" form.
The new law that begins in 2012 requires that "business payments or purchases that exceed $600 in a calendar year will need to be accompanied by a 1099 filling. In essence, the 1099-Misc is having its role changed from a form for tracking off-payroll employment to one that must accompany virtually any sizeable business transaction."
The key point to note here is that the person who makes the payment is responsible for issuing the 1099. The ramifications for the real estate industry are huge. Here is a list of just a few of the issues the industry must address before this law goes into effect in 2012.
1. Major companies will receive millions of "1099-Misc" forms
Most agents spend more than $600 on office supplies. Agents and brokers will have to obtain the taxpayer ID from organizations such as Staples or Office Depot to provide them with a 1099 if they spend more than $600 per year.
The same will be true for any other real estate vendors the agent or broker uses, including Web hosting, enhanced listings on various real estate portals, marketing companies, newspapers and magazines. The list is endless. A key question is how will these major companies be able to track all of this and how much additional cost will this add to their products?
2. Are agents required to give their brokers 1099-Misc?
Will the agent have to issue a 1099-Misc to his or her broker for each transaction? Will the broker have to issue a 1099-Misc to each seller? Who will be responsible for issuing a 1099-Misc when there is a referral fee to another agent or brokerage? What about the situation where an agent credits part of the commission back to the clients?
3. Buyer and seller 1099s
In the past, the escrow, title and mortgage company may have issued a 1099 with their closing statements. The law appears to require buyers and sellers to issue a 1099-Misc if the services cost more than $600. On a typical transaction, this could require a 1099-Misc for the escrow, the title company, the attorneys, the mortgage company, some inspectors (depending if they hit the $600 threshold), the termite company, plus contractors who handle any repairs.
The troubling issue is how to educate the public about this new requirement and what types of systems will need to be in place to handle this huge mountain of additional transaction paperwork.
Complicating the issue even further: How will these issues be addressed for clients who are not fluent in English? Having all these issues resolved prior to 2012 seems unlikely. The result could be complete and utter chaos.
4. It gets even better
Most agents spend more than $600 in gasoline. If I go to the same gas station, do I have to get the owner’s taxpayer ID number and issue a 1099-Misc, or will it apply only if I buy gasoline from the same company?
If I work out of my home, the law seems to suggest that I am required to give a 1099-Misc to the utility companies, to the people who pick up the trash, my home and auto insurance company, and even possibly my local grocery store if I spend more than $600 in open-house refreshments.
The bottom line is that this single provision in the health care reform bill will result in massive amounts of new regulations and massive confusion when it goes into effect in 2012.
This will translate into substantially higher transaction costs across the board. Let’s hope that someone in Washington wakes up to the consequences of this provision and does something about it before it turns the real estate business (as well as many other businesses) totally upside down.
Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, trainer and author of "Real Estate Dough: Your Recipe for Real Estate Success" and other books. You can reach her at Bernice@RealEstateCoach.com and find her on Twitter: @bross.
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