IRS Form 1099-misc Filing Requirements Defined as per IRC 6041

I was talking with a taxpayer the other day who registered as an LLC with Colorado Secretary of State. She developed an intriguing business model that is doing remarkably well according to the financial statement. As part of a tax planning conversation our discussion surrounding gross receipts digressed into how the billing function works. Interestingly enough the response caused my jaw to drop.

After pressing further in my quest for knowledge, turns out services were ultimately bid out using a decision support system basically attempting to identify the likelihood as to whether the ‘customer’ would issue IRS Form 1099-misc or not. YIKES!

Knowing this person to be fundamentally good yet previously misguided I informed her that if she were ever pursued criminally our conversation would not be considered privileged or confidential and as politely as possible juxtaposed the lucrative beauty of her business model versus the havoc raised by an inappropriate business practices.

Fortunately she refrained from crying in my office when realizing how drastically things could come crumbling down so my people skills must be improving. Nevertheless a drill down was prompted of among other things when specifically IRS For 1099-misc is a filing requirement.

To help her in understanding I produced an IRS Office of Chief Counsel memo asserting that payments to limited liability companies are not necessarily exempt from IRC 6041 reporting requirements, including IRS Form 1099-misc which is profoundly significant as many people believe, wrongfully so, that an LLC with an EIN is sufficient to be excluded from the 1099-misc reporting requirement.

Specifically the memo states:

“Payments to LLCs are exempt from section 6041 reporting requirements only if the LLC has elected to be classified for federal tax purposes as a corporation by filing Form 8832. …If the LLC-payees made no such election. Therefore, these LLCs would be classified as either partnerships or disregarded entities, depending on how many members they have. As such, payments to these LLCs are not exempt from section 6041 reporting requirements.”

The Analysis of the tax code is as follows:

“All persons engaged in a trade or business who, in the course of that trade or business, make payments of $600 or more to another person are required to report the payments to the IRS. I.R.C. § 6041(a). There are, however, exemptions under Treasury regulation section 1.6041-3. Generally, returns of information are not required under section 6041 for payments made to a “corporation described in § 1.6049-4(c)(1)(ii)(A).”

Treas. Reg. § 1.6041-3(p)(1).

LLCs are not within the definition of corporation unless they elect to be classified as associations for federal tax purposes. A corporation is an entity “defined in section 7701(a)(3).” Treas. Reg. § 1.6049-4(c)(1)(ii)(A). The term corporation “includes associations, joint-stock companies, and insurance companies.” I.R.C.  § 7701(a)(3). Absent an election, LLCs are not included in this definition of corporation. See I.R.C. § 7701(a)(3); Treas. Reg.  § 301.7701-2(b). Additionally, the term corporation includes”a partnership all of whose members are corporations . . . , but only if the partnership files with the pay or a certificate stating that each member of the partnership” is a corporation. Treas. Reg. § 1.6049-4(c)(1)(ii)(A). There is no record that any of the LLC sin question made this filing, and so they are not included in this definition of corporation either.”

LLCs can Elect to be Corporations

LLCs are generally eligible entities that can elect their classifications for federal tax purposes. See Treas. Reg. § 301.7701-3(a). Multimember LLCs can elect to be classified as either an association or a partnership. See Treas. Reg. § 301.7701-3(a). Single-member LLCs can elect either to be classified as an association or to be disregarded as an entity separate from its owner. See id. If an LLC elects to be classified as an association, it is a corporation for federal tax purposes. Without an election, a multimember LLC will be classified as a partnership, and a single member LLC will generally be classified as a disregarded entity for federal tax purposes.

If you’ve made it this far in the post, thank you. The take away is don’t mess around playing games with whether or not to issue IRS Form 1099-misc. LLC’s paid $600 or more in the tax year with EINs must be issued this form UNLESS the LLC elected to be treated as a corporation. Get them out ASAP they must be postmarked to the taxpayer by January 31st 2015 for tax year 2014 and are due to the IRS by March 30th 2015 if you electronically file and March 2nd if you paper file. The penalty for late filing is $100 per form.