Small Business Tax Relief Act Fails to Pass in House

House Democrats blasted Republicans for blocking a bill with tax breaks for small businesses  and the removal of a controversial 1099 information reporting requirement after the bill failed to garner the two-thirds margin needed for passage.

The Small Business Tax Relief Act would have provided nearly $20 billion in tax relief to small businesses and closed loopholes that encourage companies to ship jobs overseas. The measure, H.R. 5982, would have eliminated an expanded 1099 information reporting requirement for businesses that National Taxpayer Advocate Nina Olson recently indicated could pose potential “administrative challenges to taxpayers and the Internal Revenue Service.”

The House voted 241 to 154 in favor of the bill, short of the two-thirds margin needed for passage. Only two Republicans voted for the bill.

"Small businesses are the engine of the American economy,” said House Speaker Nancy Pelosi, D-Calif. “We must do all that we can to help them succeed after the failed economic policies of the Bush administration resulted in the loss of 8 million American jobs. Today, House Democrats voted to help small businesses. And we paid for this legislation by closing tax loopholes that promote corporations shipping jobs overseas. Yet virtually all Republicans voted no, and succeeded in blocking passage of the bill.”

The expanded 1099 reporting requirement is not currently in place, but is scheduled to take effect in 2012, requiring businesses to report to the IRS any purchase from a vendor of goods or services worth $600 or more during the calendar year. The reporting requirement is included in the Patient Protection and Affordable Care Act and is effective for purchases made in 2012 that will be reported on 1099 forms filed in 2013. Eliminating the reporting requirement would remove this potential burden from small businesses permanently.The provision was estimated to cost $19.206 billion over 10 years.

The American Institute of CPAs has called on Congress to repeal the expanded 1099 requirement (see AICPA Asks Congress to Repeal New 1099 Requirements). The Small Business Tax Relief Act received the support of the National Federation of Independent Business.

“Republicans had a choice – stand up for small businesses and provide this tax relief, or continue to protect loopholes for companies that ship jobs overseas,” said House Ways and Means Committee Chairman Sander M. Levin, D-Mich. “By defeating this bill, Republicans made clear that they care more about some companies that ship jobs overseas than small businesses that face a potential burden by this reporting requirement.  Despite all of their rhetoric about the need to eliminate this reporting requirement, Republicans walked away from small businesses when it mattered most.”

Senate Democrats are also frustrated with Republicans for blocking a related small business bill, the Small Business Jobs Act (see Senate Fails to Overcome GOP Filibuster of Small Business Jobs Bill).

House Ways and Means ranking member Dave Camp, R-Mich., blamed Democrats for not giving members of the House time to review the bill, which was just introduced Friday on the day of the vote. He asked that the bill be read before the vote, but the motion was denied. Friday was the last day before the House left for its August recess.

The 1099 provisions came from a bill introduced by a Republican congressman, Dan Lungren of California, whose original bill was called the Small Business Paperwork Mandate Elimination Act (H.R.5141. He complained that Democrats had attached his bill to the Small Business Tax Relief Act before bringing it to the floor for consideration, and said the Democrats’ larger bill would increase taxes by $19.4 billion dollars over 10 years.

“It is unfortunate the Democrat majority used my bill – which I have worked on for four months – to try to pass another tax increase," said Lundgren. "I’ve been working to repeal Section 9006 of the health care bill, which will increase the IRS paperwork reporting mandate for small businesses. This misguided provision will certainly increase costs on all small businesses and in these hard economic times, we just can’t afford to do that.”

Lundgren disagreed with the provisions for eliminating foreign corporate tax breaks in the larger bill. “Unfortunately, H.R. 5982 is entirely inconsistent with the need to expand exports,” he said. “When you tax something, you are going to get less of it. Placing additional tax burdens on American companies will make them less rather than more competitive. Penalizing American companies that compete in the international marketplace is simply wrong headed.”

The bill included a package of provisions developed jointly by the Treasury Department, the Ways and Means Committee and the Senate Finance Committee to eliminate $11.6 billion of tax breaks for companies that ship jobs overseas. They include elimination of the 80/20 rule, rules to prevent splitting of foreign tax credits from income, and limitation on the use of Section 956 for foreign tax credit planning, known as the "hopscotch" rule, in addition to other provisions. These provisions were previously passed by the House as part of H.R. 4213 with two Republicans joining 239 Democrats in support.

“I’m glad to see so many Democrats join Republicans and the American people in an attempt to repeal an important piece of the Democrats’ health care law," said Camp of the defeat of the 1099 bill. "Unfortunately, in raising taxes and pitting large employers against small business, Democrat leaders ensured this bill’s defeat. However, the message to the American people is clear – the health care law can be repealed and we can replace it with common sense reforms that would actually lower the cost of health insurance, without hundreds of billions of dollars in higher taxes, and without over one-half trillion in cuts to Medicare that threaten seniors' access to care.”

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