Senate Passes 1099 Repeal

A bill repealing the unpopular 1099 requirement of the health-care reform law now goes to President Obama for his expected signature.
Alix StuartApril 5, 2011

The onerous provision in the health-care reform law that would require businesses to file innumerable 1099 forms is on its way out. On Tuesday, by an 87 to 12 vote, the Senate passed the House version of a bill to repeal the provision. The bill also contains an alternative way of raising the tax revenue that the requirement was projected to provide. The next stop for the bill is President Obama, who has previously said publicly that he is in favor of such a measure.

The vote “is a gigantic victory for small businesses,” says Kevan Chapman, spokesman for the National Federation of Independent Business, which lobbied for the measure.

Currently, a business must provide a 1099 form to the Internal Revenue Service for any services it receives from an unincorporated firm, such as a partnership. In March 2010, the Patient Protection and Affordable Care Act broadened the requirement so that a business would have to file the form for every vendor it uses, regardless of incorporation status, for both services and goods that exceed $600 in a year. The measure, scheduled to take effect January 1, 2012, was intended to generate additional tax revenue to help fund health-care reform by extracting more tax revenue from vendors that may have previously underreported their income.

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In the newly passed amendment, some of the lost revenue would be offset by a new provision mandating that individuals pay back federal health-care subsidies if their income increases. Depending on the increase and the size of the family, the paybacks could range from $600 to $2,500.

The President’s approval of the new bill seems guaranteed. In a statement released after the Senate vote, the White House press secretary said: “We are pleased Congress has acted to correct a flaw that placed an unnecessary bookkeeping burden on small businesses. Small businesses are the engine of our economy and eliminating the 1099 reporting requirement is the right thing to do.”

Finance executives were largely in favor of the repeal, though with varying levels of enthusiasm. One CFO expressed mixed emotions. “Conceptually, the [1099 expansion] could have been a good way to strengthen tax compliance, since there’s a lot of underreporting of income that takes place,” says John Lauchert, owner of upstate New York-based Horizon CFO, which provides outsourced CFO services to small and midsize companies. “But practically speaking, it would have been an incredibly difficult process to go through.”

Others, though, see the repeal as purely good news. “The [expanded] 1099 reporting requirement was absolutely ludicrous,” says Dennis Tarnay, CFO of Lake Erie Electric in Westlake, Ohio. Tarnay testified on the topic before a subcommittee of the House of Representatives Ways and Means Committee in March, where he found a fairly receptive audience, he says. Had the repeal not gone through, says Tarnay, “I would venture to guess every company would have done whatever it could to minimize [the reporting burden], so you would have had willful noncompliance. It was physically impossible to comply with.”

(This story has been updated from the original version to include comments by Lauchert and Tarnay.)

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