Leasors who refuse to provide TINs

This is a follow-up question about rents paid by self-employed Thank you Shyster1040 for your insight on the 1099-misc rent question. Unfortunately, this has opened another can of worms. My landlords gave me TIN's without question, but my business competitors whom I rent equipment from basically laughed at me, said I was naive, no one does this, and wouldn't give their numbers. I suspect they aren't reporting the income. But what can I do about that? I want to do my taxes correctly. I absolutely must remain on good relations with these people. They can quite literally drive me out of business if they refuse to rent to me. After all, they are competitors and my clients are worth much more to them then my rental business. Now what do I do?

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Reply to
kucariga
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Anonymous tip-offs to the IRS.

Reply to
sharx35

Sadly, this is textbook "between a rock and a hard place." To comply with tax law:

  1. Check out Form W-9. The instructions tell you what kinds of payees you don't need TIN's for.
  2. Check the "Backup Withholding" section of the general
1099 instructions.
  1. Send them 1099's if you're required to do so.

-- Phil Marti Clarksburg, MD

Reply to
Phil Marti

Are those business competetors corporations? My understanding is that a 1099 is not required when what you pay is to a corporation. Stu

Reply to
Stuart A. Bronstein

You only provide 1099s to individuals. Unless these "competitors" are sole proprietorships, you have no obligation to issue a 1099. The same is true of your landlords, by the way.

Good. I wish everyone felt that way.

Reply to
Bill Brown

Sound's like you are doing business with the mob :-) You should find other vendors.

-- Vic Roberts Replace xxx with vdr in e-mail address.

Reply to
Victor Roberts

Unfortunately, the correct answer is: If you don't have the payee's TIN, you have to do so-called "back-up" withholding on the amount you pay. Typically, this means withholding 28% of the amount you pay, reporting that withholding on the Form 1099-MISC, and paying the withheld amounts over to the Treasury. The 2006 Form 1099, General Instructions, p. GEN-11, describes this result in general terms. The obvious downside to this is that, if you comply with your tax obligations, you are likely to lose business. On the other hand, if you do not you face the following risks: (a) if the person you pay does not properly report that payment as income and pay tax on it, you may be liable for the unpaid tax, plus penalties and interest, because you failed to satisfy your withholding obligations, (b) even if the payee does report your payment as income and pays the right amount of tax on it, you may still be liable for a small penalty for failing to properly report the payment. If memory serves, I believe the penalty is $50 per missing Form 1099. Unfortunately, your business interests appear to directly conflict with your tax interests, and there is no easy compromise or alternative I can give you advice on; tax reporting obligations and withholding requirements must be complied with. I don't know the extent of your relationship with your supplier/competitors, or their attitudes toward federal taxes, but I might suggest that you try talking with a local tax attorney who can give you a written opinion in plain terms that makes it crystal clear that you (and they) have information reporting requirements that require each of you to give the others your TINs (if people don't want to give their SSNs, they can instead get an EIN as a sole proprietor, which they can then use for their tax responsibilities). If that doesn't work, then I have to advise you that you need to start withholding if you cannot get TINs - perhaps a copy of the opinion I described above, coupled with the actual loss of 28% of their payments, will convince the weaker of your suppliers that you're not kidding. BTW, if you do withhold, there is nothing legal they can do to you other than to stop doing business with you - they cannot sue you to get the withheld money back; federal law gives you complete immunity if you properly withhold.

Reply to
Shyster1040

One thing you can do is try to determine which of them, if any, or corporations. Since payments to corporations are not normally reported via 1099=misc, there's an out there. Otherwise, and I don't counsel this mind you, but to preserve the status quo, do nothing for these. Chances are no one will notice. ChEAr$, Harlan Lunsford, EA n LA

Reply to
Harlan Lunsford

I believe that you mean "non-corporate" entities - don't you?

Regards,

Mark Rigotti

Reply to
Mark X. Rigotti, CPA

Thanks again everyone.

My business is providing audio and lighting reinforcement services. I'm usually hired by bands and venues who are staging concerts, street dances and such. I'm a techno-nut who loves what I do. Unfortunately, this industry does attract people who operate on the fringes of business society. I'm truely afraid to report them. After the stink I've made about tax stuff they would know immediately who was behind it setting myself up for retaliatory vandalism or worse. One competitor is a corporation. I rarely rent from him because he is expensive. I would imagine the rest are schedule C, if they report anything at all. I guess for 2006 I will claim as a business expense only rentals totaling less than $600 for each leasor and pay the extra tax on my (unfairly) inflated income. It feels dishonest because it is not what really happened. But ... As for future years, I will do more business with the (expensive) corporation, try to limit my rentals to less than $600 each from the others, attempt to afford to buy more gear of my own, and maybe, if I'm feeling really bold, try to pry a number out of them by pointing out the withholding law. Kucariga

Reply to
kucariga

As most of the other commentators mentioned, and as I overlooked in my last posting, if any of your competitors/vendors are corporations, you are, in general, not required to provide a Form 1099 with respect to your payments to them. Make sure, however, that you keep in mind the difference between a corporation and an LLC - an LLC is not a corporation for federal tax purposes unless it has elected to be treated as such, thus, if a vendor is an LLC, you should assume that it is not a corporation unless you get a properly completed Form W-9 from that vendor with the "corporation" box checked.

Reply to
Shyster1040

That would be a big mistake. Claim all legitimate business expenses even if you do not get a TIN from your vendors.

Reply to
tx3400

Simply underreporting your business expenses will not get you out of any potential trouble. If the IRS were to audit you, they would be able to reconstruct your actual expenses on the basis of your records (if nothing else, they could do so using your bank records). You would end up being given a refund for your understated expenses, but would still face the prospect of penalties and interest for failure to file the appropriate Form 1099s. I admit that this is not very likely to happen as the IRS is generally not as hawkish about understated expenses as it as about understated income; however, it is a possibility and you may find yourself getting dragged into an audit if the IRS audits one of your competitors/vendors and then decides to audit the people who did business with that person (e.g., if they discover that this person received $2,000 from you for a given year, and they then cross-check your return and find that you only reported an expense of $599, then they'll be suspicious of what's going on and may audit you as well). Another possibility that, depending on your net income for the year (and the amount of additional tax you would owe if you understated your expenses) would be to simply eat the

28% withholding tax. In that case, when you make a payment, you would pay the agreed amount; however, you would then calculate a grossed-up amount so that 72% of that gross-up amount equalled the amount you paid, and you would then remit 28% of the grossed-up amount as withheld tax. At year-end, you would send a Form 1099 to the person you paid showing the grossed-up amount as the amount actually paid, and 28% of that grossed-up amount as the tax withheld because of the payee's failure to provide you with a TIN. The IRS may disallow a deduction to you for the grossed-up amount on the grounds that the withheld amount was a "voluntary" payment and therefore not an ordinary and necessary business expense. However, because you do have an obligation to backup withhold on payees who do not provide you with a TIN, and depending on how specific the terms of your agreement with the payee are (i.e., is there any legitimate means of recasting your agreement in such a way that it can be read as providing that the amount you agree to actually remit in cash to the payee is net of any potential withholding taxes that might apply, in which case the agreement could be construed to implicitly provide that the contract price was in reality the grossed-up amount), there is a legitimate argument to be made that you should be allowed to claim the grossed-up amount as your business expense deduction. If this scheme were respected for tax purposes, it would have the effect of (a) reducing your taxable income (as well as your net cash profits) and (b) increasing your payee's taxable income (as well as giving them a credit for the withheld tax, which would effectively result in them not having to pay any more tax solely because of your gross-up). However, if it is the case that most of your vendors are playing on the shady side of the tax street, they may still be less than pleasantly surprised when they receive their Form 1099s from you.
Reply to
Shyster1040

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