The Burdensome 1099s – a Repeal in the Future?

2/17/2011

One requirement of the Health Care Reform Act mandated that, beginning in 2012, all businesses that spend more than $600 annually with any one vendor would have to send 1099 IRS tax forms to that vendor. Recognizing that this requirement would place a heavy burden on small businesses, including community banks, the Senate voted to repeal this requirement earlier this month. The House of Representatives has yet to repeal this part of the Act, however there appears to be a willingness to do so. Even President Obama called for its repeal in his State of the Union address telling Congress that it can correct “a flaw in the legislation that has placed an unnecessary bookkeeping burden on small businesses.”

The ramifications for not repealing it are many. Small businesses would need to establish a tracking system to determine when the $600 threshold had been reached. Also, it is not always readily apparent who will need to be provided the 1099s. For example, a restaurant may require a 1099, but it may be difficult to determine if the restaurant is corporate-owned or owned by a franchisee. Additionally, once it is determined who will receive 1099s, the task of collecting taxpayer identification numbers, addresses and other contact information can be arduous.

The logic behind the original requirement was to provide better tracking of information. According to the IRS, more than $300 billion in taxes goes uncollected because of unreported income. This 1099 requirement was intended to close that gap by identifying income that normally would go unreported, allowing the government to collect more revenue.

No matter what the logic, the end result would have been a much greater paperwork burden on small businesses. Luckily it appears this burden will go away as repeal seems more like a matter of “when,” not “if.”