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By Editor, April 11, 2011

On April 5, the Senate, by a vote of 87 – 12, approved the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 (the 1099 Act) retroactively repealing the expanded Form 1099 information reporting rules added by recent legislation. The bill was signed by President Obama on April 14^th.

Repeal of Expanded 1099 Reporting Rules for Businesses

Currently, businesses are required to file a Form 1099-MISC to report payments of $600 or more made to persons who provide nonemployee services to the business. Reporting is not required if the payments are made to a corporation.

Effective for payments made after 2011, the Health Care Act extended this 1099 reporting requirement to include gross payments of $600 or more for the purchase of any type of property. It also did away with the exception for corporations. So, thanks to the Health Care Act, starting in 2012, businesses were going to have to report all payments of $600 or more for the purchase of property and services, even those made to corporations.

Businesses quickly cried foul on this recordkeeping and reporting nightmare in the making—not even the IRS liked this provision. Congress and the President agreed on the need for its repeal. But in true Washington fashion, it took awhile. Finally, the 1099 Act repeals the Health Care Act’s extension of the Form 1099 reporting requirements for payments made to corporations and payments made for the purchase of property.

Bottom Line: The Form 1099 reporting rules for businesses do not change after 2011. Thus, businesses will have to report payments of $600 or more to service providers. However, payments to corporations will not need to be reported, nor will payments for property.

Repeal of Expanded 1099 Reporting Rules for Rental Real Estate

Before 2011, the 1099 reporting requirements applied only to payments made in the course of a trade or business. Payments made in a passive investment activity were not subject to these requirements. For payments made after 2010, the Small Business Jobs Act of 2010 (SBA) provided that (with a few exceptions not important for this article) any person receiving rental income from real estate (landlords) would be considered to be engaged in a trade or business and, thus, would be subject to the same 1099 reporting requirements that apply to businesses. Accordingly, thanks to SBA, for 2011, landlords would generally be required to file Form 1099-MISC to report payments of $600 or more made to noncorporate service providers (for things like yard care, painting, and accounting). And, for payments after 2011, they would be required to report payments made to corporations and payments made for the purchase of property just like other honest to gosh businesses.

Fortunately, the 1099 Act repeals the SBA extension of the 1099 reporting requirements to landlords who are not otherwise considered to be engaged in a trade or business of renting property. As a result, landlords making payments of $600 or more to a service provider (such as a plumber, painter, or accountant) will not be required to file Form 1099-MISC, unless their rental activities rise to the level of a trade or business.

Bottom Line: The 1099 reporting rules for landlords do not change after 2010.

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By Editor, March 4, 2011

Background

The Self-employed Health Insurance Deduction has long been available for the health insurance of the self-employed individual, his or her spouse, and any dependent children. But, there are a number of important taxpayer-friendly developments for 2010, including a surprising change in interpretation by the IRS.

IRC Sec. 162(l)(2) allows self-employed proprietors and partners, and more-than-2% S shareholders treated as partners for fringe benefits, to deduct 100% of their health insurance as a page 1, for-AGI income tax deduction. To be eligible for this deduction, the taxpayer must have a health insurance plan that can be considered as associated with a business activity. Also, the taxpayer must not be eligible to participate in a health insurance plan that is subsidized by any other employer. The deduction is limited to the taxpayer’s self-employment income, or in the case of an S shareholder, the wages subject to payroll taxes.

Nondependent Children under Age 27 Can Now Be Covered

One of the features of the Health Care legislation passed last March provides that effective as of 3/30/10, an employee may receive tax-free treatment for employer-provided health insurance for a child who has not attained age 27 by the end of the year, regardless of whether the child is eligible as a tax return dependent. Prior to this legislation, an employee would have had taxable compensation to the extent an employer paid for health insurance for a nondependent child.

This legislation made a corresponding change to the self-employed health insurance deduction of a self-employed taxpayer. If a self-employed individual pays the health insurance premium for a nondependent child who has not attained the age of 27 by 12/31/10, premiums paid after 3/30/10 are includable in the self-employed health insurance deduction.

Example 1: Phil, a self-employed proprietor, has been claiming the self-employed health insurance deduction for his family. The health policy covers himself, his spouse, and their 20 year-old dependent daughter, a college student. Phil’s older child, Flip, age 25, was recently laid off from his W-2 job in a nearby community and is again living at home. Phil is helping Flip by paying his separate health insurance policy and also covering a few other essential expenses. Beginning 3/30/10, Phil may include Flip’s health insurance premiums in computing the self-employed health insurance deduction on his Form 1040 .

Medicare Part B Premiums Can Count as Part of the Deduction

For several years, the IRS instructions to Form 1040, for the self-employed health insurance deduction line on page 1, have stated at that Medicare Part B premiums could not be treated as part of the deduction. Of course, this guidance was only applicable to someone over age 65 and older enrolled in Medicare who also had self-employment income. But many self-employed taxpayers stay active past age 65.

Surprisingly, the 2010 Form 1040 instructions, at line 29, now state “Medicare B premiums can be used to figure the deduction.”

We have not seen any other IRS guidance explaining this change in position. Earlier guidance on this point was informal: IRS instructions, an IRS Publication, and a 1995 Field Service Advisory memo (FSA 3042, 12/19/95). However, the current Form 1040 instructions can be relied upon, and apparently reflect an updated position of the IRS. Accordingly, the Medicare B premium should be claimed as part of the line 29 self-employed health insurance deduction beginning in 2010.

The Medicare B premium amount, of course, is disclosed on the Form SSA-1099 . For the last several years, the Medicare B premiums assessed by the Social Security Administration have been income-sensitive. For 2010, the annual amount ranges from approximately $1,300 to $4,200. Further, if both spouses are enrolled in Medicare, these amounts will generally be doubled.

Example 2: Ed and Edna, each age 67, both are enrolled in Medicare and receiving social security retirement benefits. Ed is still active as a self-employed partner in the farming partnership with their two sons. While Ed’s share of the partnership K-1 self-employment income is not large, he receives substantial rental income from the partnership for the use of his land, and he and Edna report a substantial AGI in their Form 1040. Their Medicare B premiums withheld from their social security benefits were the maximum in 2010 of $4,243 each. In preparing their Form 1040 for 2010, the IRS instructions indicate that Ed and Edna may claim the Medicare Part B premiums of $8,486 as additional self-employed health insurance.

For 2010 Self-employed Health Insurance

Is Deductible for SE Tax Purposes

In the September Small Business Jobs Act, Congress also adjusted the self-employed health insurance deduction in another manner. The legislation amended IRC Sec. 162(l)(4) to allow the deduction to be claimed both for income tax purposes and self-employment tax purposes in 2010. Previously, of course, the health insurance deduction had only been allowable for the income tax computation.

For 2010, this SE tax break makes the ability to claim post-3/30/10 health insurance for nondependent children (who do not attain age 27 by 12/31/10) more beneficial, and also makes the Medicare B premium deduction of greater value.

Other Implications of Reduced Self-employment Income in 2010

Does the reduction in self-employment income for 2010, because of the one-year deductibility of self-employed health insurance premiums, also affect other calculations driven by self-employment (SE) income? For example, a self-employed taxpayer’s earnings for qualified retirement plan purposes are based on SE income. So, for 2010, must SE income for this purpose be reduced by the health insurance deduction? And, the self-employed health insurance deduction itself is limited to the amount of the taxpayer’s SE income. Do we need to do a dreaded simultaneous equation to determine the health insurance deduction if SE income was low?

Here’s our analysis of these questions:

1. SE Income for Qualified Retirement Plan and IRA Funding. For both qualified plan and IRA purposes, earned income is defined by reference to IRC Sec. 401(c)(2) . In turn, IRC Sec. 401(c)(2) refers to net earnings from self-employment as defined in IRC Sec. 1402(a) . If the story ended here, we would need to reduce self-employed earnings for retirement plan funding in 2010 by the health insurance deduction. But the Committee Report to the legislation enacting the one year cut in SE income for health insurance says that “It is intended that earned income within the meaning of section 401(c)(2) be computed without regard to this deduction for the cost of health insurance.” It goes on to note that a technical correction to the legislation may be needed. As a result, SE income for retirement plan funding in 2010 should not be reduced for the health insurance deduction.

Income Limit for Self-employed Health Insurance Deduction. We won’t bore you with the citations on this one, as it is also addressed directly in the Committee Report of the September legislation. That language states that “earned income for purposes of the limitation applicable to the health insurance deduction is computed without regard to this deduction.” So again, we use SE income without the health insurance deduction as the business net income limit for this health insurance deduction (and no need to remember how to calculate a simultaneous equation!).