IMGCAP(1)]As more people have become aware of the tax burden and unintended consequences resulting from the provision in the health care reform law mandating expanded Form 1099 information reporting, a consensus has been building to repeal this provision. The only current debate appears to be how?
Section 9006 of the Patient Protection and Affordable Care Act, scheduled to take effect in 2012, would require businesses to report to the IRS any purchase from a vendor of goods or services worth $600 or more during the calendar year.
There are currently three bills being considered. They are:
1. HR 5141 sponsored by Rep. Dan Lundgren, R-Calif., and its companion bill S 3578 sponsored by Sen. Mike Johanns, R-Neb.
2. Senator Johanns Amendment # 4595
3. HR 5297 sponsored by Rep. Bill Nelson, D-Fla.
HR 5141 and S 3578 totally eliminate Section 9006 without a payfor, an offset that would pay for the repeal. This is logical because the cost to the government of administering and complying with the provision would exceed the expected revenue. But, it also goes beyond what the Treasury and the Internal Revenue Service requested. That was to require all personal service businesses to receive a Form 1099 regardless of the entity type. These bills have the support of most business organizations, but since there is no payfor, it is doubtful that they will pass without substantial pressure from constituents.
Amendment 4595 also fully repeals Section 9006 and it contains a payfor. Unfortunately this payfor would, again, cost the government more than it would generate. It deletes the PPACA Prevention and Public Health Fund. This fund is to be used to pay for prevention and public health programs, including diagnostic testing and immunization programs. Any medical professional will attest to the fact that it is far less costly to prevent an illness than to cure one and it is less costly to cure an illness in the early stages than in the later stages.
The final bill is HR 5297. This bill changes the requirement for sending a Form 1099 for products from $600 to $5,000. Businesses with less than 26 employees would be exempt from sending Forms 1099 for products of any cost. While this reduces some of the filing requirements, it is so fraught with complexities, it is no better than the original provision.
Some of the identified problems include:
1. It discourages businesses from hiring additional employees. To avoid filing requirements, midsized business could intentionally limit hiring or even fire employees to stay below the reporting requirement. This goes against the economic recovery goal of putting people back to work. It also does not state whether part-time employees are counted as one. If the answer is yes, an employer might fire part-time employees and increase the workload of the remaining employees. If part-time employees are not included, employers might cut back hours of current full-time employees.
2. It incorrectly defines a small business. By using the number of employees versus gross or net receipts, the bill would exclude multimillion-dollar operations that have only a few employees and include small labor intensive operations that may have very low gross receipts.
3. It does not define the term services nor does it replace it with personal services. The bill only excludes the purchase of $5,000 of goods from the reporting requirement. An airline flight is a service, as is the use of a hotel room. Is the purchase of electricity or insurance that of a good or a service? The Treasurys intent was to include only personal services. This bill does not change the PPACA expanded definition.
4. It does not reduce the record-keeping requirements of the initial law for most businesses. Businesses with over 25 employees would still need to keep track of all their purchases to determine if they are nearing or are over the $5,000 limit. All businesses would still need to track payments for services. Therefore, all accounting systems would still need to be modified.
5. It discourages business loyalty. Once a business comes close to the $5,000 reporting limit, they will look to switch vendors. This hurts the original vendor who may have purchased inventory with the expectation of a continuing relationship. It hurts the purchasing business because they will have to spend time looking for a new source of goods.
6. It encourages the use of credit cards. It codifies the exclusion of payments made by credit cards from 1099 reporting. This has three major negative effects. First, it adds to the cost of all products. Every business would now require every other business to offer credit card payments. Each additional layer of charged purchases would add an extra layer of credit card charge fees. Second, large national chains could either provide their own credit card or negotiate a lower rate than a small business, resulting in lower costs than mom and pop businesses. Finally, most businesses might not be able to obtain a credit limit high enough to charge all their purchases. This would be particularly true for new smaller retail and wholesale operations.
7. It delegates total authority to the Internal Revenue Service. The bill would allow the IRS to write rules which identify, and provide exceptions for, payments which bear minimal risk of noncompliance. We only have to look at the credit card reporting regulations to see how a poorly written law results in unreasonable regulations. Will the IRS exclude the requirement of sending Form 1099s to large publicly traded companies? If yes, that would be devastating to true small businesses.
8. The provision is so poorly written that it is open to unintended interpretation. The actual code states, In the case of payments in consideration of property, this subsection shall be applied by substituting $5,000 for $600 AND this subsection shall not apply in the case of any person employing not more than 25 employees at any time during the taxable year. The drafters of the provision feel that the lack of a comma before and means the reporting exclusion only applies to property. Another interpretation is that any person employing less than 26 employees would no longer fall under Section 2101. If this is true, they would not have to send ANY 1099s or even W-2s.
Congress intends to vote on these bills when the members return from the August recess. We all saw what happened when we ignored the original 1099 provision. It is time to act now and let your congressional representatives know that Amendment # 4595 and HR 5297 are unacceptable.
Thala Taperman Rolnick, CPA, is a sole practitioner in Phoenix and a CPE instructor with MaresNichols Education Corp.
