1099 Reporting Provision Repeal Signed into Law

There seems to be some sanity currently reigning in Washington. Last October, Cybertary alerted our faithful readers about a little publicized provision coming out of the Patient Protection and Affordable Care Act (aka Health Care Reform) that was likely to strike terror in the hearts of small businesses everywhere.

The section of the bill, Section 9006, buried the implication of the provision in cryptic language, stating only that corporations are no longer exempt from Internal Revenue Code Section 6041, and that the code will be expanded to include goods as well as services. Now, unless you have the tax code memorized (which would make you a scintillating guest at most parties), you probably overlooked that little section. Couple that with the fact that the requirement had no direct relevance to health care and you can understand why this little time bomb gained attention in the months after the historical passage of the Affordable Care Act.

Beginning in 2012, the provision would have required all businesses to send 1099 tax forms to other businesses for goods and services that exceed a $600 per year annual threshold. Coined the “Rat Tax” by Representative Daniel Lundgren (R-CA) because it required businesses to report on the companies with whom they do business, the intent was to collect lost revenue from companies that under-report on their tax returns. It was estimated to raise $17 to $22 billion over 10 years. The cost to businesses, however, would likely far exceed that estimate in terms of lost productivity and the burdensome reporting requirement.

Prior to this section being included in the bill, only unincorporated businesses that purchased services greater than $600 annually were required to file a 1099 with the IRS and with the provider. The new rule extended the requirement to all companies, charities, and state and local governments. It also expanded the provision to include purchases of goods or products. For everything from office supplies, flights, hotels, client entertainment that exceeded the arbitrary $600 annual limit, the small business owner would have had only one recourse: Send a 1099. The enormity of this requirement for small business could not be ignored.

In April of 2011, President Obama signed into law the revocation of the business tax-reporting requirement that members of both political parties disliked. The bill had a rocky road to revocation, though, with various early versions falling to defeat. When the President signed HR 4, which repeals the provision that required business and real estate owners to file a 1099 form with the IRS for every vendor to whom they paid more than $600 in a year, he made the following statement: “Today, I was pleased to take another step to relieve unnecessary burdens on small businesses by signing H.R. 4 into law”. Business groups had lobbied hard against the provision. The President signed the bill despite taking issue with the way that it was to be paid for; namely, a so-called “clawback” provision that goes after people who get more in health care subsidies than entitled to under the Affordable Care Act.