Correcting the 1099 Mistake
The Senate is expected to vote on April 5 on a 1099 fix resulting from passage of the Patient Protection and Affordable Care Act of 2010 (P.L. 111-148). Specifically, Section 9006 would require all small businesses that purchase more than $600 in goods or services from a supplier to issue a form 1099 for tax purposes to that supplier. Speaking to the Senate Small Business & Entrepreneurship Committee last fall, Lawrence S. Nannis, a CPA and Partner at Levine, Katz, Nannis + Solomon, PC, testified:
… in practicality, this means that every time a small-business owner ships a package with Federal Express or buys office supplies with Staples, and the expenses total more than $600 by year-end, they would need to keep the receipts, prepare a form 1099 and file them not only with the IRS, but with Federal Express and any other companies as well. As enacted, every small-business owner—including myself—will face an increased paperwork and administrative burden for each additional 1099 form prepared. …. Increased costs are incurred for mailing additional forms and for hiring outside assistance to ensure that businesses are correctly complying with the law. The new requirements will dramatically increase these costs, as owners will be forced to spend more time collecting the information needed to properly complete these forms, pulling capital out of the business that could be better used to reinvest in the business and create jobs.
Indeed, small business leaders from across the political spectrum have rallied for repeal of this provision. President Obama noted in his State of the Union speech that he was willing to correct “a flaw in the legislation that has placed an unnecessary bookkeeping burden on small businesses.”
The 1099 provision was inserted into the legislation, of course, because of the “tax gap,” or the difference between what American should pay in taxes versus what they actually do. The Internal Revenue Service estimated that the tax gap in 2001 was $345 billion, noting that third-party reporting of expenses improved overall compliance rates. Business owners – primarily small businesses – underreported their income by $109 billion, according to this estimate. Recent research has questioned these findings, noting that most of the small business filing errors were not “deliberate or intentional” and the IRS study did not adequately examine the tax gaps of large or international firms. Nonetheless, the view that small businesses were responsible for a large chunk of the tax gap has lead to increased audits and greater scrutiny. The 1099 provision was intended to provide a check on small firms to ensure that they adequately reported their purchases from suppliers, and this should increase tax revenues. Indeed, when the Congressional Budget Office scored the “Small Business Paperwork Mandate Elimination Act of 2011” (H.R. 4), which would repeal the 1099 requirement, it said that it would cost the government $21.9 billion from FY 2011 to FY 2021.
Given Congressional pay-as-you-go rules, the fact that the government would lose $21.9 billion over the next ten years has posed the biggest challenge in getting the 1099 provisions repealed. Congress tried to repeal them at the end of the 111th Congress, but could not agree on how to pay for the lost revenue. In addition, some Democrats balked at the fact that the bill, if passed, would repeal a section of the Patient Protection and Affordable Care Act, which could lend support to those who wish to repeal the entire Act. With that said, these provisions are so unpopular with small business owners that the 112th Congress has eagerly tackled repeal. On February 2, the U.S. Senate passed the “FAA Air Transportation Modernization and Safety Improvement Act” (S. 223), which included an amendment by Sen. Debbie Stabenow (D-MI) that repealed the 1099 requirements, paying for it by rescinding discretionary funds. Subsequently, on March 3, the U.S. House passed H.R. 4, which was introduced by Rep. Daniel Lungren (R-CA). This bill would pay for the lost revenue by forcing those individuals who receive overpayments of health insurance tax credits to pay back more money to the government. Democrats, in general, oppose this funding mechanism, and President Obama has challenges with how both the House and Senate versions of the bill are funded.
Nonetheless, the Senate is expected to vote on H.R. 4 on April 5. Sen. Robert Menendez (D-NJ) plans to introduce an amendment to the bill which challenges how it is paid for. Business groups have been lobbying for Senators to oppose the Menendez amendment. Passage of either the bill or the Menendez amendment would require 60 votes, but assuming H.R. 4 passes (and does not need to return to the House), it would then go President Obama for his signature. While he does not support the funding offset for H.R. 4, he is on-record supporting repeal of the 1099 provisions. The President has not said whether he would sign H.R. 4 or not.