From Washington, DC. Small businesses’ message may have gotten through loud and clear to some Congressmen and women during the election recess. Legislation has been introduced this week to eliminate the onerous 1099 reporting requirement which was included in the massive health care bill passed earlier this year (a.k.a. ObamaCare).
In case you missed the outcry, beginning on 1/1/12 all businesses (big, small, private or public, incorporated or not, for-profit or not-for-profit) must track all expenditures to all vendors. For every vendor to whom a business spends at least $600 a year, the business must prepare a year end 1099 form stipulating each vendor’s legal name, taxpayer ID number, legal address and the total amount of money spent during the year. A copy of the form must be sent to the vendor by January 31st of each year and a copy to the IRS by February 28th.
In the past, the 1099 requirement was only for payments to individuals and unincorporated entities. The requirement was also not well enforced since it is not always easy for a small business bookkeeper to know whether “Main Street Office Supplies” is incorporated. The working assumption was that if it was a bona fide business with employees, business cards, address, etc., and the payment checks were to a company name, there was no need to send a 1099. In fact, an anomaly that almost no one knew about in the current law requires that 1099’s must be issued for all payments over $600 to any law firm. (Guess Congress doesn’t trust attorneys to accurately report their income.)
A tsunami of paperwork
Unless Congress takes action, all small businesses and non-profit organizations will be forced to begin tracking all expenditures by all employees to all vendors. Take for example a small business that reimburses its employees for gas purchases. The business owner will need to track exactly what gas station each employee uses for each fill-up and if more than one employee uses that same station, the purchases will have to be lumped together. If the combined payments for the year total $600 or more, the business owner will have to contact the station owner, get the legal name and mailing address plus the taxpayer ID number, prepare a 1099 form and mail it to the vendor and IRS. There is an additional requirement that on occasion you may be need to deduct 28% backup withholding tax from your vendor payments and send that to the IRS along with the 1099 form.
Major corporate vendors are also included in this blanket requirement: payments for air travel, rental cars, hotels, restaurants, FedEx, Post Office, Starbucks – think of the possibilities. How many 1099’s do you think your small business would have to issue each year? Is the Hyatt hotel you stayed at last week in Cincinnati under the same corporate ownership as the one in Houston next week? What about the hotel restaurant where you had your meeting – is it part of the hotel or is it operated by a concessionaire? Who do you have in your office that has the time to make the phone calls or do the internet research to get the necessary information about the vendor to put on the 1099? By the way, if you decide to blow it off and ignore the requirement, the penalty is 50% of the amount that should have been reported.
How could Congress not understand
From the larger perspective, it is inconceivable that Congress could have been so blind to the onerous paperwork burden this requirement will put on small business owners – as well as big business accounting departments. What planet do they live on that they couldn’t easily look at the requirement and immediately understand the paperwork nightmare being created? But some say, they did understand and they simply didn’t care since the health care bill did include a provision (and a budget) for adding 16,000 IRS agents to process the mountain of paperwork that will be generated. Maybe this is the Congressional solution to creating more jobs.
This issue was brought before the Senate back in September when Senator Mike Johanns (R-NE) introduced an amendment to the Small Business Jobs and Credit Act to repeal the 1099 requirements. The amendment was summarily rejected without debate.
One more try
Now Senator Johanns is reintroducing his bill and Senator Max Baucus (D-MT) has introduced similar legislation to repeal the 1099 reporting requirement (SB 3946) with the comment, “…businesses need to focus their efforts on growing and creating good-paying jobs – not filing paperwork”. Amen to that!
The problem is that passage of a bill is uncertain. Senate Majority Leader Harry Reid’s spokesman declined comment when asked if the Senator would allow the bills to be brought to the floor for debate. Senator Mary Landrieu (D-LA) would prefer to see the minimum raised to $5,000 before reporting is required which would help with the local gas station purchases, but would not alleviate the major inconvenience of getting detailed corporate information about airlines, rental cars, hotels, et al. Democratic leaders in the House have made no movement toward bringing this issue to the floor in the remaining 30 days of the 111th Congress.
Right now the odds are that this issue will be pushed forward into the 112th Congress and any action delayed until summer at the earliest. In the meantime, small business owners should start looking at their options for new accounting software and T&E expense accounting that is significantly more robust than currently exists.
Since this 1099 requirement is supposedly going to raise $19 billion over the next 10 years by finding otherwise unreported income, balancing the federal budget and decreasing the deficit may take precedence over a small business owner’s lament about paperwork burden.