Q&A #180 – Does Form 1099 reporting use cash basis or accrual basis?
Question: My nonprofit uses accrual basis accounting, so our normal practice is to record payments upon receipt of an invoice for completed services received. We use this data for generating Forms 1099, but recently we have had several contractors and service providers request corrections of their 1099s for payments they did not receive until the new calendar year. Are we permitted to use accrual basis for issuing Forms 1099, or are we required to use cash basis?
Answer: The Treasury Regulations and Form 1099 instructions provide that the 1099 reporting requirements apply to payments made “during the calendar year.” This guidance strongly suggests that nonprofits should issue Forms 1099 to their vendors and service providers based on when the payments were actually made (cash basis), even if the organizations otherwise use accrual basis for tax and accounting purposes.
While the official guidance on the Form 1099 does not explicitly refer to “cash basis” vs. “accrual basis,” section 1.6041-1 of the Treasury Regulations provides that an information return is required “for each calendar year with respect to payments it makes during the calendar year.” Similarly, the General Instructions for Certain Information Returns clarify that Form 1099 and other related forms are “used to report amounts received, paid, credited, donated, [or] transferred … during the calendar year.” This language is consistent with a cash basis approach to Form 1099 reporting.
Based on this guidance, nonprofits should track payments to vendors and service providers on a cash basis and report on the Form 1099 only payments that were actually made during the calendar year regardless of the fiscal year and accounting method otherwise used by the organization.
Planning Tip – When possible, touch base with vendors and service providers prior to issuing Forms 1099 to confirm when and whether they received payments made towards the end of the calendar year. Discrepancies between the tax year in which payments were sent by the payor vs. received by the recipient can lead to tricky timing issues and, in some cases, requests from recipients to amend their 1099. Addressing possible issues in advance (consulting with a qualified tax advisor when necessary) will help to avoid unnecessary time spent fixing Form 1099 filings later.
The timing of when a particular payment is reported on the Form 1099 generally will not have a major impact on a nonprofit organization. However, these issues can be significant for the payment recipients, since Form 1099 reporting can lead to IRS scrutiny over when taxable income must be reported by the recipient. Careful handling of this issue is generally appreciated by an organization’s vendors and service providers.
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Q&A #171 – Can nonprofits rely on Form W-9 information when sending the Form 1099?
Q&A #170 – Must nonprofits issue a Form 1099 for a contractor based in a foreign country?
