1099 Basics – In July

That’s right, it’s never too early to start the process of preparing your 1099s (you will thank us come January). Here are a few tips to start preparing those 1099s.

Who do I prepare 1099s for?

The simplest answer for the most common type of 1099, the 1099-MISC, is they need to be prepared for anyone that provided services to you. However, they are not given to someone who is an employee (here’s your refresh), and you need to have paid them $600 or more for the year (we’re talking accounting, legal, janitorial services, repairs, snow removal or lawn maintenance, etc. unless the company is incorporated). If the company is incorporated, then a 1099-MISC is not required, except with lawyers … then you still get to fill out the form.

Other items reported on a 1099-MISC include rent paid to an individual or a business that is not incorporated, royalties of $10 or more, other income payments including prizes and awards, employee wages paid after death in the year following death, director fees, etc.

Another common 1099 form is the 1099-INT. This form is required for interest paid of $10 or more, any foreign tax on interest withheld and paid, or backup federal withholdings regardless of the amount of the interest payment.

Please note, this is a very simplified list of items that 1099s need to be issued for. IRS.gov has several booklets that go into more detail on what is required and instructions for each form is available. On their website, type 1099 instructions in the search box and a list of forms and instructions will pop up.

So what am I supposed to do in July?

Identifying the vendors that need 1099s now will save you a lot of headache come year end. You can do this by having each of your vendors complete and return to you a Form W-9 (also found on IRS.gov). This form will give you their business name, address, tax identification number and type of entity. Best practice is to have all of your vendors complete this form, even if you know they will not be providing services to you. If circumstances change and you are required to provide a 1099 to them in another year, then you are already prepared!

Once the W-9s are returned, you can begin updating your records so when it comes time to complete your 1099s you will have the correct name, address, and TIN on file. You should also flag your vendors so it accumulates the amounts for you. Many accounting programs, such as QuickBooks, allow you to indicate the vendor will need a 1099 at the end of the year. Most also allow you to indicate the type of form and which box the amounts should be reported in. Having your system set up to accurately do the work for you will save tons of time at year end.

If all of these suggestions are followed, you should have time in January to put your feet up on your desk and relax because you won’t be spending hours trying to find vendor information and trying to figure out the amounts to report.

If you have questions, we’re always here to help.

Debt v. Equity Financing

Often debt financing is considered a bad thing, something only businesses that are in trouble take on; a last resort. While debt isn’t always a good idea, we are here to tell you it isn’t always a bad idea either.

Let’s take a look at some terminology…

Debt Financing | We are talking about taking out a loan.  Debt financing is when an individual or organization lends you money that you must pay back (along with that thing we call interest). There are a variety of options when looking for a loan, from a traditional commercial loan to alterative online lending companies.

Equity Financing | Here we’re talking about bringing in a partner. Equity financing is when an individual or organization gives you money in return for an ownership percentage in your company. Again, there are a variety of equity financing options such as individual investors, venture capital, angel investors, etc.

Let’s take a look at why debt might not be so bad…

Temporary Cash Flow Problems

We aren’t talking about cash flow issues that you expect to last, because debt financing probably won’t help in that case. We are talking about temporary cash flow deficits that occur during the normal course of your business.

For example, let’s say you are a construction company here in North Dakota (where the seasons are winter and construction). During the winter season, business is typically slower and cash is tighter. When the construction season ramps up, you are more than capable of cash flowing your business. In this case, taking on a business loan or line of credit might be a good idea. Not to mention, loan agreements can be structured to allow for seasonal changes in your business. For instance, a loan can call for interest only payments December through May and principle and interest payments the remaining months of the year.

Need another example? Let’s say you work with reimbursement-type grants (meaning you have to spend the money prior to receiving grant funding). At times, this may cause cash shortfalls, even if they are short-term. Again, this is where a line of credit might be a good idea.

You Don’t Want to Give Up Ownership

Bringing on a partner can be a good thing. For example, a partner could bring experience and connections to help grow your business. In addition, a partner is making an investment, therefore you aren’t stricken with loan payments.

However, bringing on a partner can have its disadvantages. Equity investor relationships are much like a parent-child relationship. Parents want their children to make decisions on their own but parents are always in the background, checking in and asking questions. Parents are parents forever.

With debt financing, the relationship only lasts as long as the term on the loan. After that, you are free and clear. In addition, a lender doesn’t have a say in the day-to-day operations of your business (this is of course as long as you are making your payments).

Sometimes, It Just Makes Sense

Let’s say you need a new piece of equipment to be more efficient or take on a new project. With the purchase, you are likely going to either have less cost or more revenue. Ignoring timing difference, this equates to more dollars coming in. As long as those dollars coming in are more than the loan (plus interest), taking on a business loan might make sense.

Speaking of loan payments, if you chose a fixed rate loan (interest rate that is locked), the payments are easier to plan and budget. In addition, even though interest is an added cost to debt financing, it is partially recaptured due to the fact that it is a business expense and therefore tax deductible.

In summary, we understand (and hopefully you do as well) that debt financing is not the answer for every cash flow need. However, in some cases debt is a perfectly good solution. Just as in life, there are pros and cons to most all decisions in business. The key is to understand your business and understand your options so you are able to find the best fit for your future.