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ARVC’s Bambei Applauds Repeal of Form 1099 Law

April 15, 2011 by   - () Leave a Comment

President Barack Obama today (April 15) signed the law repealing the expansion of 1099 reporting requirements that would have placed an extreme paperwork burden on the backs of small business.

ARVC President/CEO Paul Bambei applauded the president’s action.

“This is an important act for small business and will help all maintain the paperwork burdens on small business as they currently exist – and that’s certainly still excessive,” he said in a news release. “ARVC will continue to work aggressively toward and support all reasonable measures that will simplify the life of small business and reduce their paperwork and tax burden.”

Background

Under existing tax law, a business taxpayer making payments to a service provider (the “payee” in IRS language) aggregating to $600 or more for services in the course of a trade or business in a year is required to send an information return to the IRS (and to the service provider-payee) setting forth the amount, as well as name and address of the recipient of the payment (generally on IRS Form 1099). Under the law, the business taxpayer is not required to issue a Form 1099 to a corporation that provides services to it.

The new health care reform law made two changes. The first is to require businesses to issue the Forms 1099 to corporations as well as all persons in a trade or business. The second is to expand significantly the scope by requiring the issuance for payments made to “property” providers as well as service providers. The changes were to take effect for payments made after December 31, 2011.

The theory behind the expansion was that when third parties report a business’ income to the IRS, compliance increases dramatically. At the time of passage of the expansion, the Joint Committee on Taxation had estimated it would raise $17.1 billion over ten years. The provision has nothing to do with health care reform, it was added to the legislation solely as a revenue offset.

However for most businesses the challenge was going to be obtaining tax identification numbers from essentially all of their vendors and issuing the Forms 1099. Ironically, the businesses issuing the Forms 1099 are subject to penalties for failing to file timely and/or correct Forms 1099.

H.R. 4 also repeals a second expansion of the Form 1099 requirement. The other expansion of the Form 1099 requirement was added by the Small Business Jobs Act in September, 2010. Under prior law, recipients of rental income from real estate who are not otherwise considered to be engaged in a trade or business of renting property were not subject to the same information reporting requirements as taxpayers who are considered to be engaged in a trade or business. The expansion requires these “incidental” rental income recipients making payments of $600 or more to service providers that provide services for the rental property to issue Form 1099s to those service providers (e.g. cleaning service, maintenance). (This incidental landlord expansion is in effect this year. So the incidental landlord expansion applies as the law now exists, to issue Forms 1099 to unincorporated service providers only. But next year, if the general repeal did not happen, incidental landlords would be issuing Forms 1099 for service and goods and to corporations too.)

Statement by President Obama on H.R. 4

“Today, I was pleased to take another step to relieve unnecessary burdens on small businesses by signing H.R. 4 into law. Small business owners are the engine of our economy and because Democrats and Republicans worked together, we can ensure they spend their time and resources creating jobs and growing their business, not filling out more paperwork. I look forward to continuing to work with Congress to improve the tax credit policy in this legislation and I am eager to work with anyone with ideas about how we can make health care better or more affordable.”

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