By Ken Berry
New cost basis reporting rules now apply, for the first time ever, to Form 1099-B sent to investors and the IRS. But other onerous reporting rules for businesses and landlords scheduled to take effect in 2012 have been repealed.
Are you confused? You're not alone. Here's a brief recap on what is and isn't taking place this year.
Reporting for investments: Previously, financial institutions were required to report on Form 1099-B certain information relating to the sale of investments, such as the date of the sale and the amount of the sale proceeds. It was the investor's responsibility, however, to provide the acquisition date and the purchase price on Schedule D, although many brokers often provided additional information when it was available.
This meant that investors – and their tax return preparers – had to figure out the cost basis of investments for tax purposes before the information was transferred to Schedule D. Typically, an investor had some flexibility in choosing a method for establishing the basis of securities that were sold if he or she had acquired multiple shares of the same security at different times and prices. In essence, the investor could choose to identify the shares being sold as the ones that provided the optimal tax result. Thus, an investor could effectively decrease a taxable gain or increase a loss.
But now the rules have changed. Under the Emergency Economic Stabilization Act of 2008, financial institutions must report on Form 1009-B the relevant cost basis information, but only for "covered securities" phased in over a three-year period. The new cost basis reporting rules apply to:
- Stocks (both domestic and foreign), American Depository Receipts (ADRs), real estate investment trusts (REITs), and exchange-traded funds (ETFs) taxed as corporations acquired on or after January 1, 2011.
- Mutual funds, dividend reinvestment plans (DRPs), and other ETFs acquired on or after January 1, 2012.
- All other remaining securities – such as options, fixed income instruments, and debt instruments – acquired on or after January 1, 2013.
Therefore, cost basis information must be reported on Form 1099-B for stocks acquired after 2010, but not for mutual fund shares acquired before 2012. The new rules for mutual fund shares acquired after 2011 will be reflected on 1099-B forms sent to investors next year.
If an investor doesn't select a cost basis method indentifying the shares of covered securities at the time of the transaction, the institution will use a default method. The default method for stocks acquired after 2010 is the first-in, first-out (FIFO) method. For mutual funds shares acquired after 2012, the broker may choose to use the FIFO method or an "average cost" method as a default.
Reporting for businesses and landlords: Traditionally, businesses have reported on Form 1040 payments compensating parties for services rendered if the annual total received by the provider is $600 or more. This reporting requirement also applies to commissions, rents, royalties, interest and the like.
However, these reporting rules don't extend to payments for goods. Furthermore, a business generally doesn't have to report payments made to corporations.
Under the Affordable Care Act of 2010 (ACA) – the controversial health care legislation – a business was required to provide 1099s for payments to corporations, beginning in 2012. The health care law also imposed these extended reporting rules on payments for goods.
These onerous requirements faced strong opposition from the business sector and the tax community. Ultimately, the extended requirements were repealed by the Comprehensive 1099 Taxpayer Protection and Replacement of Exchange Subsidy Overpayments Act of 2011. So there are new no reporting requirements for businesses in 2012. It's as if this provision of the health care law never existed.
Similar rules would have increased reporting responsibilities for landlords. Under the Small Business Jobs Creation Act of 2010, new reporting rules were imposed for payments for services in conjunction with rental properties, beginning in 2011. Subsequently, the ACA extended the reporting rules to payments to corporations and to payments for goods. These changes were scheduled to take effect in 2012. As with the provision applicable to businesses, the 2011 law repealed the new reporting requirements for landlords.
Calm the waters: Undoubtedly, many clients will panic about the new rules taking effect – and those that were supposed to take effect and won't – this year. You can be a calming influence.
Set the record straight and explain the implications to your clients.