Corporations and 1099's

[mbigelow]

This isn't how-to tax question, more like curiosity regarding tax policy. Does anyone know why corporations are generally exempt from the requirement to be issued 1099's? Is this just another example of lobbyists' hands getting involved in policy or is there a logical and well-meaning justification for it?

[kathyc2]

I believe it's because checks made to a corporation need to be deposited to business account and can't just be cashed.

[spanel]

I believe it's because checks made to a corporation need to be deposited to business account and can't just be cashed.

I've always thought this too. An individual can cash a check, no paper trail hense the 1099. A corporation cannot cash a check and has to deposit it, hense the lack of 1099 requirement.

Chris

[mbigelow]

I believe it's because checks made to a corporation need to be deposited to business account and can't just be cashed.

Makes sense and I guess corporations aren't typically paid cash. Unless they're fish vendors, evidently, as per 1099-misc instructions, a 1099 is required if the amount paid to a corporation is "Fish purchases for cash". Seems like kind of a bizarre inclusion to me!

[Rapid Robert]

I think the rule about corporations is in the regs, not the IRC, so the reasoning may be even harder to find -- I imagine there is some "proposed regs" document with a discussion somewhere, but ones from last century are hard to find for free on the internet.

As mentioned above, the fact that corporations are already subject to more reporting and filing requirements in general than individuals might be part of the reason. Corporations can easily be identified via state registries. Also, some of the largest companies doing business are corporations, so if they weren't excluded, I imagine there would be a burden of hundreds of thousands, if not millions, of extra filings. Imagine if every Schedule C filer needed to issue a 1099-MISC to H&R Block for preparing their taxes (if the business portion of the fee was $600 or more).

I've always wondered about the exception to the exception for Attorneys and Medical payments. Is it because attorneys have more complicated payee arrangements (retainers, trust accounts, etc), or some other reason? I have one client who is an S-corp receiving medical payments, often the 1099-MISC forms are still not issued, or the wrong box is used.

"Reportable payments to corporations. The following payments made to corporations generally must be reported on Form 1099-MISC.

Medical and health care payments reported in box 6.
Fish purchases for cash reported in box 7.
Attorneys' fees reported in box 7.
Gross proceeds paid to an attorney reported in box 14.
etc."

[TaxGuru]

Different Tax Years

I have seen many discussions over the past decades on the issue of 1099s for payments to corps and the main reason for not requiring them is the difficulty in reconciling the tax years.

Since 1099s are calculated on a calendar year basis and many corps use other fiscal years, the IRS computers can't do a proper matching of income between 1099s and 1120s.

For S corps and calendar year C corps, our rulers may one day require 1099s; but that would require the payers to know the payee corp's FYE.

[Snaggletooth]

Corp have better business records

This mess about 1099-MISCs began in 1982 with the affectionately-called TEFRA law.

I believe proprietors and casual contractors notoriously had deficient records at the time (and not a lot better 35 years later), whereas corporations usually had double-entry ledgers and other financial controls. Less likely for corporations not to report revenue, especially when having to prepare financial statements to bankers and lenders, etc.

By contrast, casual contractors can work out of the back of their truck and just stuff money in their pocket. Issuance of a 1099 not only requires them to report income, but also brings credence to the tax deduction of the payer. Note that personal expenditures do not require 1099s, but only business payers.

A plumber fixes and charges $50,000 to homeowners, and $75,000 to business and construction contractors. He only receives 1099s for $75,000 (ideally).

[Rapid Robert]

the difficulty in reconciling the tax years.

Since 1099s are calculated on a calendar year basis and many corps use other fiscal years, the IRS computers can't do a proper matching of income between 1099s and 1120s.

They got smarter with Form 1099-K, where any fiscal year can be accommodated. It wouldn't be that hard to do the same for 1099-MISC, after all even for the little guys, Quickbooks could easily produce totals by month and pop them into an annual tax form. What I can't figure is whether 1099-K must be issued to a corp. I see the word "person", and I know that sometimes that is defined in the tax code as including certain entities, and sometimes not.

That still leaves another question: if the issue is fiscal vs. calendar years, then why are there exceptions to the 1099-MISC exception for attorneys and medical service providers that are corporations? Are they precluded from using fiscal year tax reporting (I don't recall ever seeing that).

[Jiggers]

S-Corporations and Personal Service Corporations must use a calendar year.