Forms 1099: The Who, What, Where and When … Plus an Interesting Twist for Cannabis Businesses
Form 1099 is an important tax document that all businesses must file when applicable. There are several variations of forms 1099 and one should be filed when a business pays over $600 for a service.
Who Gets a Form 1099?
It starts by obtaining a signed form W-9 whenever a new vendor is set-up in your accounting system. This provides the information your business needs to complete and file the 1099s at year-end. 1099s are given to anyone you pay contract labor, i.e. your landlord, your lawyer and any other service provider. If the service provider is a corporation, there is no need to issue a form 1099. If there is doubt about whether a form 1099 should be issued, call the vendor and advise them that you are submitting one.
A copy needs to be sent to the IRS. That is why the IRS is so concerned about all required 1099s being filed. It ensures the payment recipients report their income on their tax return. It also secures your deduction for the service you paid for, unless it is disallowed by other IRS code sections, like 280E. During an audit, one of the first questions an IRS agent will ask is regarding the proper filing of 1099s.
What Products or Services require a 1099? – An Interesting Twist for the Cannabis Industry
In general, only service providers, and not sellers of products, require 1099s. However, in a unique twist, it may be in the best interest of a retail cannabis business to issue 1099s to the wholesalers from which it buys its pounds. This can be especially helpful if the retailer is paying cash for products.
According to Bernie Taillon, a well-respected CPA who provides bookkeeping and tax return preparation services for Colorado cannabis companies, in the case of IRS audits, sometimes the 1099 is the only documentation for cash transactions. In audit situations, the 1099 has preserved cost of goods sold deductions for his clients.
Where and When Do 1099s Get Filed?
1099s get filed at the IRS office in the instructions provided with the blank forms based on the location of your business. If you requested and received completed W-9s from your vendors filing out the 1099s, it is a simple matter. You report what you have paid vendors along with their name, address and Federal ID number or Social Security number.
The forms can be handwritten or typed and printed from a computer and sent to the recipient by January 31st for the prior calendar year. The professional staff at Bridge West believe in the “better late than never” theory when it comes to filing 1099s. So, if you have missed filing some or all the 1099s you were supposed to file by January 31st, file them anyway, even if it a year or two late.
There can be penalties for late filing of 1099s, but in our experience, the IRS can be forgiving if the taxpayer voluntarily comes forward and files them when he or she learns they are late.
What Happens if You Get a 1099 and Don’t Report It?
If you or your business receive a form 1099, you must report the income on your tax return. The IRS computers are iron-clad in this regard. It may take a year or two, but the Service will catch-up on all unreported income. You may have heard stories about someone winning big in Las Vegas and not reporting it. Yes, gambling winnings are taxable, and the casinos are meticulous when it comes to reporting big wins on a form 1099-G. Without fail, the big winner will receive a notice of tax due with interest and penalties.
If you dispute the amount on any form 1099 you receive, contact the issuer immediately to resolve the discrepancy. The issuer can correct any mistakes on a form 1099-C. If you cannot reach the issuer, you can adjust the reported amount to the correct one. This is done by taking a deduction or increasing the income on your business tax return, Form 1065 for partnerships and Schedule C for sole proprietors. Be sure to have and retain the documentation for any adjustments you make.
The big takeaway
1099s are serious forms that need to be taken seriously. Know your filing requirements and if you receive a form 1099, be sure to include the income on your tax return!
If you have any questions about form 1099s, or would like to schedule a consultation, contact Jim Marty, CPA, MS, ABV, the CEO and Founder of Bridge West LLC at jmarty@bridgewestcpas.com.