Just when you thought it was safe to venture into planning for the impact of health care on your small business, a little publicized provision coming out of the Patient Protection and Affordable Care Act (aka Health Care Reform) will 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 has no direct relevance to health care and you can understand why this little timebomb is now gaining attention.
Beginning in 2012, the provision will require 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 requires businesses to report on the companies with whom they do business, the intent is to collect lost revenue from companies that under-report on their tax returns. It is estimated to raise $17 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 controversial 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 extends the requirement to all companies, charities, and state and local governments. It also expands the provision to include purchases of goods or products. For example, if a business buys $50 per month in business supplies from Staples or OfficeMax, it will now have to send a 1099 to Staples or Office Max as well as one to the IRS. Take a business flight? You will need to send a 1099 to the airline. Stay a week in a hotel? Send a 1099. The enormity of this requirement for small business cannot be ignored.
In order to file the required 1099, a businesses would have to get a Taxpayer Information Number (TIN) or in the case of individuals, their Social Security Number (SSN). According to further research, the procurer of the goods or services is responsible to secure the number and for its accuracy.
Removing the fear of identity theft that is already rampant from the equation, can you imagine the time and effort that will be wasted in tracking down tax identification numbers? On the other hand, if a business chooses not to comply with the reporting, they are accountable for withholding the relevant taxes. This alternative comes with additional gotchas, including opening themselves up for potential penalties, interest and the inevitable audit. And the third option, not taking legitimate business expense deductions because it is too much of a hassle to file the appropriate paperwork would result in increased tax burden for already strapped small businesses. Talk about a nightmare with any course of action!
The good news is that this reporting mandate is being actively challenged in Congress, being high on the agenda of both parties when Congress returned last month. There are at least two pieces of legislation that have been tendered that either repeal the rule outright or make substantive changes that would lessen the burden for small businesses. With the mid-term elections of 2010 coming up fast on the horizon, there is the very real possibility that this nightmare may turn out to be just a bad dream.
Small businesses may feel they have entered a Haunted House at 1099 Street, with floors that give way, rabid dogs that bay at the moon, and residents who come out at night to suck their blood. Let’s hope that this Haunted House is only a movie scene back lot ersatz building that really doesn’t exist.
