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A brief provision in the health-care reform law could create big reporting problems for small businesses.
Joseph McCafferty, CFO.com | US
August 19, 2010
A little-noticed provision in the Patient Protection and Affordable Care Act is suddenly generating a lot of attention. The new rule requires all businesses to file 1099 forms if they purchase $600 or more in goods or services from another business during a year. While the rule was largely overlooked in the early analysis of the health-care law, a recent uproar has put it in the spotlight, and efforts are now under way in Congress to repeal the measure.
Formerly, only unincorporated businesses that purchased services greater than $600 in a year were required to file a 1099 with the Internal Revenue Service 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 more than $600 in office supplies from Staples over the course of a year, it will now have to send a 1099 to Staples and file another one with the IRS.
Critics say the new tax-filing rule, which is slated to go into effect for the 2012 calendar year, will bury small businesses under a mound of paperwork. "It's a nightmare for small businesses," says Joseph Wallin, a partner who specializes in small-business law at Davis Wright Tremaine. "They simply don't have the resources to deal with this."
"The real complexity is the dimension of adding goods to the mix," notes Benson Goldstein, senior technical manager on the tax staff at the American Institute of Certified Public Accountants. He says the process of verifying tax-identification numbers for nearly all vendors and figuring out where to send the forms (to the local store or the corporate headquarters, for example), will create a "superburden" on small companies. In a letter to members of the Senate, the AICPA wrote: "This expansion of information reporting may prove to be so burdensome to small businesses that we believe it will significantly contribute to the hurdles to growth and formation that businesses face."
According to a National Federation of Independent Business survey, at $74 an hour, tax paperwork is the most expensive paperwork burden placed on small businesses by the federal government. "There will be a lot of front-end time and work on the part of businesses to update their payment systems and work with accountants and lawyers to make sure they are in compliance with the new rules," says Bill Rys, tax counsel at the NFIB. "It will also result in more audits and letters and questions from the IRS that will come at an additional cost to businesses," he adds.
The new rule will also have an impact on large companies, says Lynda Foertschbeck, vice president of tax consultancy IRS Compliance. "Larger companies could see anywhere from a 5- to 10-fold increase in the volume of 1099s they need to file," she says. Also, CFOs could face new risks as a result of the provision, warns Foertschbeck, since compliance is often pushed down to the accounts payable or IT departments. "For CFOs who sign the corporate tax return, if they don't have oversight to make sure they are up-to-date with this rule, they could expose the company to significant tax liability," she says. Foertschbeck adds that finance executives could even face personal liability if they are found by the IRS to have "intentional disregard" of the law.
One reason the rule change is just now coming to light is that the new provision (Section 9006 of the health-care law) is somewhat cryptic, 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. "It slipped through the cracks, which happens when you have a 2,000 page bill," says Wallin. "Unless you were familiar with the underlying tax code, it was hard to understand exactly what the change was." He also points out that the change has nothing to do with health care.
Companies were promised some relief from the impact of the rule change when IRS commissioner Douglas Shulman stated in May that the agency plans to use its "administrative authority to exempt from this new requirement business transactions conducted using credit cards and debit cards."
Many tax experts expect Congress to take some action on the issue when it reconvenes in September. Plans are already in the works by both Democrats and Republicans to either repeal the rule outright or make changes to lessen the burden on small companies. Sen. Mike Johanns
(R-Neb.) has proposed the Small Business Paperwork Elimination Act, which would repeal the new filing requirement completely. He has also proposed the measure as an amendment to the Small Business Jobs Act that is currently making its way through Congress. A similar bill sponsored by Rep. Dan Lungren (R-Calif.) in the House currently has 160 co-sponsors.
A competing proposal sponsored by Sen. Bill Nelson (D-Fla.) would change the rule rather than repeal it, making it more palatable to small businesses. Nelson's proposal would eliminate the filling requirement for companies with fewer than 25 employees and hike the threshold for large businesses reporting purchased goods from $600 to $5,000.