Small Business Jobs Act of 2010 — The Dark Side

On September 27, 2010, President Obama signed into law the Small Business Jobs Act of 2010 (the “Act”).   While the White House claims that the Act will stimulate growth and hence jobs, and many business organizations have expressed public support for the Act, there is a dark side to it.

Rental Income Information Reporting

Under the Act, taxpayers who rent real estate must now report payments of $600 or more for rental property expenses, with three exceptions: (i) taxpayers who only temporarily rent their principal residences (including members of the military); (ii) taxpayers whose rental income is less than an IRS-determined amount; and (iii) taxpayers for whom the reporting requirement would create a hardship, as determined by the IRS.  This reporting required will be effective for purchases after December 31, 2010.

Penalties for Failure to Timely File Information Returns

The Act increases penalties for failure to timely file information returns with the IRS, which includes Forms 1099 and W-2.  This is particularly significant in the case of Form 1099.  Currently, a business is required to file a Form 1099 with the IRS to report purchases of goods and services above $600 made from unincorporated providers. As part of the healthcare reforms passed earlier this year, from 2012, this will be expanded to include purchases from all providers, including business entities, thus greatly increasing the paperwork burden for small businesses.  (An example sometimes given to show the effect of this requirement is that of an interstate trucking company filing a 1099 for every gas station at which its drivers purchase more than $600 of fuel.)  The penalties for the late filing of a 1099, per 1099 that is required to be issued, are as follows:

$30 penalty, if not more than 30 days late (previously $15);

$60 penalty, if more than 30 days late and before August 1 (previously $30);

$100 penalty for filing a 1099 on or after August 1 (previously $50);

$250 penalty for intentional failure to file (previously $100).

The maximum penalties that can be imposed per year have also increased.  The IRS employs a “tiered” system that specifies penalty amounts based on levels of violation (i.e., the delay in filing and whether it was corrected in a timely manner).  There are three tiers corresponding to the first three ‘per 1099’  penalties above.  The maximum penalty also depends up whether the taxpayer meets the definition of “small business”, i.e., gross receipts of not more than $5 million.

The first-tier maximum penalty increases from $75,000 to $250,000 (from $25,000 to $75,000 for small businesses).  The second-tier penalty increases from $150,000 to $500,000 (from $50,000 to $200,000 for small businesses).  The third-tier maximum penalty increases from $25,000 to $1.5 million (from $100,000 to $500,000 for small businesses).

New Source Rules on Guarantee Fees Affecting International Business Operations

Under the Act, guarantee fees paid to a non-U.S. entity will be treated like interest payments to a non-U.S. entity, i.e., guarantee fees paid by a US entity to a non-US entity will now be characterized as a US source payment subject to US withholding tax (30% of the gross amount) as if it were an interest payment, unless a W-9 or W-8 BEN is obtained and an exemption from withholding applies.  This provision of the Act relating to guarantee fees applies immediately after enactment of the Act on September 27, 2010.


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