An until-now unnoticed provision of the new health care overhaul law could change the way U.S. businesses—including freelance workers—prepare for tax day, causing an avalanche of additional recordkeeping and reporting.
According to Section 9006 of the 2,409-page Patient Protection and Affordable Care Act, beginning on January 1, 2012 all businesses will have to issue 1099 tax forms not just to contractors but to any individual or corporation from which they buy more than $600 in goods or services in a tax year. Currently 1099s need only be issued to individuals, not corporations.
The requirement will now include items such as shipping charges, hotel bills, and equipment purchases, all currently exempt from 1099 reporting.
While the notion of sending a tax form to Costco for every large purchase may seem absurd to small business owners, that’s not the worst of it, says Marianne Couch, a principal with the Cokola Tax Group in Michigan and former chairwoman of the IRS Information Reporting Program Advisory Committee’s subcommittee on small business and self-employed tax issues.
Names, Numbers for Everything
“It’s not so much the increase in the 1099s that will be the primary issue—although that certainly will mean, most notably in first year, significantly higher numbers of pieces of paper going out through the mail,” she says. Rather, she says, the biggest headache is likely to be data collection—gathering names and taxpayer identification number information for every payee and vendor that we do business with.
The new law contains two separate provisions eliminating exemptions that have applied to 1099 filings. The first eliminates the exemption from issuing 1099s to corporations, now treating them the same as individuals for reporting purposes. In the second, the phrase “amounts in consideration for property”—i.e., purchases of goods—is added to the existing requirement to issue 1099s for services.
The removal of the corporate exemption had been bandied about Washington for years, most notably in a Government Accountability Office paper last year that suggested the government could close the “tax gap,” an estimated $345 billion in federal taxes annually in part because there was no 1099 paper trail on the income.
“We’ve seen it coming for quite some time, so we’ve just been waiting for the other shoe to drop,” said Couch. More of a surprise was the removal of the goods exemption, which apparently happened during the flurry of rewrites to the health care bill that took place in the Senate Finance Committee last fall.
Millions More Forms
The two provisions combined could require millions of additional tax forms to be sent out. Couch says she’s heard estimates from colleagues on the IRS advisory committee of as much as a fivefold increase in 1099 filings once the new law kicks in.
“It’s a pretty heavy administrative burden,” particularly for small businesses without large in-house accounting staffs, says Bill Rys, tax counsel for the National Federation of Independent Business. “If you cater a lunch for other businesses every Wednesday, say, that’s a lot of information to keep track of throughout the year.”
A Democrat aide to the Senate Finance Committee, which inserted the changes into the health care bill last fall, defended the move.
“Voluntary information reporting improves tax compliance without raising taxes on small businesses, which is why Presidents G. W. Bush and Obama both proposed similar policies to this one,” wrote the committee staffer in an email to Budget & Tax News.
Tax experts say there’s one potential upside in the new law for business owners: Eliminating the corporate and goods exemptions at least means businesses will no longer have to pore over every transaction to figure out whether it needs a 1099—if it crosses the $600 threshold, it’s in. Couch says her firm already recommends collecting tax data on all vendors because the IRS requires businesses have it on hand at the time of the transaction or face backup withholding penalties.
“There are probably going to be some hiccups along the way because systems will need to be redesigned,” says Couch. “But overall I believe it will make compliance on the payer end a lot more streamlined and easier. Because you don’t have to have a lot of staff figuring out if they go in the reportable or the non-reportable box. Now everything is going to go into the reportable box.”
Although the IRS has yet to issue final regulations on the new law specifying how the provisions will be implemented, Congressional opponents of the move aren’t taking any chances. Rep. Dan Lungren (R-CA) has already introduced legislation to repeal the new 1099 requirements, garnering more than 50 House cosponsors.
Neil deMause ([email protected]) writes and reports from Brooklyn, New York. He is a regular contributor to Metro New York, The Village Voice, and City Limits, Extra! and coauthor of Field of Schemes, a book exposing the economic harm of sports stadium subsidies. He also operates the www.FieldofSchemes.com Web site.