How ObamaCare Could Kill Small Businesses With Paperwork
Yet another "hidden" provision of ObamaCare is revealed to hold nasty surprises for America's small business owners.
Hidden among the 2,400+ pages of the health care reform bill is a new paperwork requirement that could prove incredibly onerous for America’s small businesses:
In order to pay for the health care benefits of the Patient Protection and Affordable Care Act (PPACA), the scope of Form 1099 was considerably extended by PPACA Section 9006. Internal Revenue Code Section 6041 currently contains numerous exceptions from Form 1099 reporting requirements. In general, current 1099 reporting covers only services paid to individuals and partnerships. Absent the IRS making regulatory changes, after the PPACA change becomes effective, no meaningful exemptions will exist. If a vendor receives more than $600 in total during the year, a 1099 will be required.
CNN described the new provision in a May article that seems to have gone largely unnoticed:
An all-but-overlooked provision of the health reform law is threatening to swamp U.S. businesses with a flood of new tax paperwork.
Section 9006 of the health care bill — just a few lines buried in the 2,409-page document — mandates that beginning in 2012 all companies will have to issue 1099 tax forms not just to contract workers but to any individual or corporation from which they buy more than $600 in goods or services in a tax year.
The stealth change radically alters the nature of 1099s and means businesses will have to issue millions of new tax documents each year.
Right now, the IRS Form 1099 is used to document income for individual workers other than wages and salaries. Freelancers receive them each year from their clients, and businesses issue them to the independent contractors they hire.
But under the new rules, if a freelance designer buys a new iMac from the Apple Store, they’ll have to send Apple a 1099. A laundromat that buys soap each week from a local distributor will have to send the supplier a 1099 at the end of the year tallying up their purchases.
The bill makes two key changes to how 1099s are used. First, it expands their scope by using them to track payments not only for services but also for tangible goods. Plus, it requires that 1099s be issued not just to individuals, but also to corporations.
Taken together, the two seemingly small changes will require millions of additional forms to be sent out.
“It’s a pretty heavy administrative burden,” particularly for small businesses without large in-house accounting staffs, says Bill Rys, tax counsel for the National Federation of Independent Businesses.
One survey estimates the increased compliance costs of the new requirements at $ 6,000 per year per business, but warns that this number could become larger depending upon how much time is needed for clerical workers to obtain all the background information necessary to prepare and file the 1099, especially considering the fact that the number of scenarios that would be implicated by this new law are seemingly endless:
1. You travel out-of-town and pay more than $600 for a hotel room.
2. You occasionally order sandwiches from the local deli so that employees or clients can “work through”. Although each payment is no more than around $20, the aggregate paid throughout the year exceeds $600.
3. In a series of smaller purchases, the office manager purchases more than $600 of office supplies from a vendor over the internet.
4. You pay more than $600 per year to a bottled water vendor who makes delivery to your office.
5. You purchase a few office chairs from a local retailer for a total of more than $600.
6. You purchase gas for a business automobile from certain gas stations, the total of which are more than $600 during the entire year.
7. You pay more than $600 throughout the year in shipping or delivery changes to a single vendor, even though each individual charge may be no more than $15.
For large corporations and medium-sized businesses who’ve invested in computerized expense-tracking systems, this new law may not impose that many new burdens, although it will require them to purchase updated accounting software packages before the new requirements go into effect. For the nation’s thousands of small businesses, though, these requirements could be devastating. An additional $ 6,000 or more per year could make or break some businesses, and it will undoubtedly have an impact on the investment and hiring decisions that small business owners make.
The only industries that stand to profit from these regulations can be found in the accounting and legal fields. Outside of there, this looks like yet another burden imposed by the state on the very businesses they’re depending upon to0 fuel an economic recovery.
H/T: To my co-blogger Dave Schuler, who mentioned this on last week’s OTB Radio.
I would love to see the cost-benefit analysis of this change. It certainly assumes a level of cheating on reporting income that I could not imagine.
With due respect Doug this is baloney. How many small businessmen do you know who pay $600 per night for their hotel accomodation out of town? When I retired about eight years ago I worked as a consultant for a few years and was required to file accordingly. You couldn’t have been a smaller businessman than me but I kept a fairly rigorous record of my expenditures which involved quite a lot of international travel using a proprietary software package. The idea that small business people don’t already keep a record of Fedex services, gas for cars, office supplies and furniture purchase, food services and so on is ridiculous.
It’s $600 per year, not per night. I certainly have spent $600 to stay two nights at a Hampton Inn in Chicago.
[T]he IRS is asking for public comment about these egregious new reporting requirements. Perhaps if enough people respond, we may get a rethinking of these new requirements.
According to the IRS news release, there are three ways to submit comments:
E-mail to: No*************@ir********.gov. Include “Notice 2010-51″ in the subject line.
Mail to: Internal Revenue Service, CC:PA:LPD:PR ( Notice 2010-51), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.
Hand deliver to: CC:PA:LPD:PR ( Notice 2010-51), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC, between 8 a.m. and 4 p.m., Monday through Friday.
The deadline to comment is Sept. 29, 2010. [a href=”http://news.outright.com/taxes/irs-invites-public-comment-on-new-1099-requirements/”>IRS Invites Public Comment on New 1099 Requirements
This administration cares little for the difficulties small business may face. It’s all about moving the country leftward and growing government. It’s not unexpected and it’s not something we didn’t already know about the Democratic party.
Small business does keep track of it’s expenditures but seldom do we itemize by individuals amounts paid to various vendors. It will be a tough mandate.
I guess they were right when they said they would have to pass the bill to find out what’s in it. We’re in the best of hands.
PD Shaw says:
Monday, July 19, 2010 at 11:40
“It’s $600 per year, not per night. I certainly have spent $600 to stay two nights at a Hampton Inn in Chicago.”
a) that’s not what he said
b) who the heck if you’re in business in a small way and it involves several hundred dollar hotel bills is NOT keeping a record of them. duh!
For me the key point in this ill-considered reporting requirement is that it was intended to raise about $19 billion in additional revenue. When divided among all of the businesses that will be required to do the additional bookkeeping and reporting, I estimate that comes to about $300 per business.
It’s going to cost me more than $300 a year to do the additional bookkeeping. I’d rather just pay the $300 per year as a surcharge without all of the extra bookkeeping.
Contact the IRS Steve, per my comment preceding yours. You can even use email.
Steve Plunk says:
Monday, July 19, 2010 at 11:44
“Small business does keep track of it’s expenditures but seldom do we itemize by individuals amounts paid to various vendors. ”
Based on my knowledge of small businesses which is not insignificant, I would strongly disagree with this. Most of them have accounts with their local vendors, even down to the local deli, and if employees are racking up large travel bills they know by and large where the money is being spent. I’m not saying everyone is perfect at record keeping or the odd thing doesn’t slip through the cracks but record keeping is extensive and ubiquitous for all businesses large and small these days, and fairly easy too with pc’s.
Brummagem Joe, he certainly did not say $600 per night, you read that into the sentence. The tax requirement is $600 paid to anybody during a tax year. And that includes staying twenty nights at the Hotel 6 for $30 per night. Or is Hotel 6 a single company or does it consist of separate franchises, and if you ordered on-line from a discounter, do you owe the paperwork to the online company?
sam, you’re being constructive and apt to give people misperceptions about the blogosphere.
Speaking as a small businessman (in a business, currently, of one employee), the bigger problem here isn’t the dollar cost. Printing out a few – or even a few hundred – 1099 forms isn’t really that expensive. I save all my business receipts anyway, so again, not a huge deal.
The big issue, ad Doug partially noted in his original article, is *TIME*. This new regulation requires a tracking rather a lot of information that most businesses don’t currently track from their customers or vendors – for instance, federal tax ID, which is required for a 1099 form. It also requires the time and effort to manage the forms, print them, mail them, etc.
Yes, a lot of the work can probably be automated by updating my accounting software. But that’s a few hundred dollars I was hoping not to have to spend for a while (and in a sane world, there’s no real reason I should have to). More to the point, even when it’s automated there’s a time investment required to do it. It may not be huge, but I’m already working essentially from when I get up until when I go to bed most days – and the days that’s not true are hardly days off, they’re just shorter.
This is a headache and a time requirement that I simply don’t need. But the biggest problem isn’t this law or rule. On it’s own, it’s not really all THAT onerous. The problem is that this is one of THOUSANDS of “not all THAT onerous” rules that add up to be a gigantic pain in the ass. And the problem is getting worse, not better. I was in small business 10 years ago as well, and the climate for small business was much better then (even though it was still a pain). Looking at the changes, I blame *BOTH* Bush and Obama, and *BOTH* a Republican and a Democrat controlled Congress. They’ve all contributed.
This seems like an obvious goof, something that will be reversed before the deadline.
It’s too silly to survive.
(Either that or “vendor” has a narrower meaning than commentators expect. Perhaps a hotel room put on a business credit card does not establish a “vendor” relationship. A hotel filing an invoice, might.)
This seems like an obvious goof, something that will be reversed before the deadline.
It would be an odd goof, in that it involved rather intentional inclusion of specific new language.
It’s too silly to survive
I’ve seen little evidence such a thing exists.
Indeed, if “too silly to survive” meant anything the U.S. Code would be substantially smaller
PD Shaw says:
Monday, July 19, 2010 at 11:56
Regardless of what he meant or didn’t mean with his ambiguous “and pay more than $600 for a hotel room.” are you suggesting the majority of small businesses don’t track even quite modest expenditures and certainly several hundred dollar hotel bills? Because if you are, you’d be wrong as Russell above points out.
Russell Newquist says:
“The problem is that this is one of THOUSANDS of “not all THAT onerous” rules that add up to be a gigantic pain in the ass.”
You have a point about their collective weight but I would say having run a small business a long time ago, much longer than 10 years, I’d have actually said the record keeping which was basically paper based was much harder to do. Using my little software package made it a piece of cake really, it did the math for me, the lot . To some degree it’s subjective I suppose.
Per Sam:
“[T]he IRS is asking for public comment about these egregious new reporting requirements. Perhaps if enough people respond, we may get a rethinking of these new requirements.”
I think it is just about a certainty that this reg will be rethought and streamlined somehow. The information Sam has graciously supplied suggests that IRS isn’t interested in a gigantic pile of newly required 1099s landing in their lap. It looks like here’s your chance to join forces with the enemy and fight for justice!
I wouldn’t have thought a hotel stay on a credit card makes the hotel a vendor although an account with your local UPS/Fedex office does. However, if you held an “event” at hotel (exhibition etc) then they’d be a vendor because they’re going to submit an itemized invoice with all the data you need to maintain a record.
A good point, the bill should have a specific definition for what it means by “vendor”.
Brummagem Joe:
“I wouldn’t have thought a hotel stay on a credit card makes the hotel a vendor although an account with your local UPS/Fedex office does. However, if you held an “event” at hotel (exhibition etc) then they’d be a vendor because they’re going to submit an itemized invoice with all the data you need to maintain a record.”
This used to be true. This is one of the things that this new bill specifically changes. When it takes effect, *ANYBODY* to whom you pay more than $600 in a fiscal year will count as a Vendor and it will require a 1099. That’s part of what we’re complaining about.
Also: by your very assumption that they don’t count as vendors, you’re making an implicit (if unintentional) point about how silly the new rules are.
I agree that running a small business was probably much harder substantially longer than 10 years ago. However, it’s not really a fair comparison. 10 years ago I was using software to track everything. Today I use software to track everything. It seems to me like the proliferation of accounting software to even the smallest of small businesses has merely served as an enabler, allowing the rules to become ever more complex.
The rules as they exist are now so complex that despite being a relatively bright guy who’s done a good bit of research, I’m fairly certain that there’s *SOMETHING* I’m getting wrong for no reason other than that I just don’t know about it. The good news is that it’s my understanding that should an audit occur, the IRS is fairly lenient on those like me who are making an honest attempt at it and just make mistakes. But there’s something wrong when things have progressed to the point where they have to be.
Actually it doesn’t. Here’s the actual wording in question:
(Emphasis mine)
Here is the text of section that is being appended to: http://solari.com/blog/?p=7230
It seems to be exactly as bad as Doug says.
Russell Newquist says:
Monday, July 19, 2010 at 12:56
On technology I don’t know, the annual torture with adding machines and vast amounts of paper in box files was unbelieveable relative to a pc based recording system. And before anyone laughs I’d have actually said the IRS has become a bit more user friendly that it used to be. I never had issues when I was a one man band but had some aggravation when I was working and there’s definitely much less of the little Hitler mentality than 25 years ago.
There is a bright side, though. The law gives the Secretary quite a bit of discretion about the form the reporting is to take, so you may not have to file a 1099 for payments covered in subsection (h), nor send those corporations a copy of the report as required in subsection (f), which would considerably reduce the cost in both money and more importantly time.
(Emphasis mine)
TL;DR Brummagem Joe:
Democrats great! Republicans bad!
There saved everyone the trouble of having to read his stuff ever again.
Well, guys, here’s the official request for comments from the IRS. Note the italicized section, my emphasis:
REQUEST FOR PUBLIC COMMENTS
The Treasury Department and the Internal Revenue Service intend to issue guidance that will implement these changes to section 6041 in a manner that minimizes burden and avoids duplicative reporting. This notice requests comments regarding possible approaches to the section 6041 guidance that will assist in achieving those goals.
For example, the Treasury Department and the Internal Revenue Service have already issued a proposed regulation that would allow a broad exception from section 6041 information reporting for payment card transactions that would otherwise be reportable under section 6050W of the Code, effective for payments beginning in 2011. This proposed regulation is expected to be finalized later this summer. Thus, business purchases made with payment cards will be exempt from information reporting under section 6041.
The Treasury Department and the Internal Revenue Service request comments on additional circumstances in which duplicative reporting might otherwise occur under section 6041 and another Code section, such as section 3402(t), and on rules that would prevent such duplicative reporting. Specific comments are also requested regarding the burden associated with implementing the new reporting requirements for different types of taxpayers and businesses.
Additional issues on which comments are requested include:
1. The appropriate scope of the terms “gross proceeds” and “amounts in consideration for property” in section 6041(a), as amended, and how to interpret these terms in a manner that minimizes the reporting burden and avoids duplicative reporting.
2. Whether or how the expanded reporting requirements should apply to payments between affiliated corporations, such as payments related to intercompany transactions within the same consolidated group.
3. The appropriate time and manner of reporting to the Service, and what, if any, changes to existing practices for Form 1099 information reporting to the Service are needed to minimize burden in compliance with the new reporting requirements.
4. What, if any, changes to Form W-9, Request for Taxpayer Identification Number and Certification, and the existing rules for soliciting taxpayer identification numbers (TINs) are needed to minimize the burden for payors to obtain TINs from payees, what are the privacy concerns with respect to TINs, and what are other concerns regarding identifying payees.
5. How should the backup withholding requirements for missing TINs under the expanded new reporting requirements be administered in order to minimize burden on payors.
Interested parties are invited to submit comments on this notice by September 29, 2010. Written comments should be submitted to: Internal Revenue Service, CC:PA:LPD:PR (Notice 2010-51), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Alternatively, comments may be hand delivered between the hours of 8:00 a.m. and 4:00 p.m. Monday to Friday to CC:PA:LPD:PR (Notice 2010-51), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, D.C. Comments may also be transmitted electronically via the following e-mail address:
No*************@ir********.gov. Please include “Notice 2010-51” in the subject line of any electronic communications. All comments will be available for public inspection and copying.
The principal author of this notice is Keith Brau of the Office of Associate Chief Counsel (Procedure & Administration). For further information regarding this notice, please contact Keith Brau at (202) 622-4940 (not a toll-free call).
Again, this is supposed to be a revenue-increasing measure. Unfortunately, it’s a revenue-increasing measure that will cost businesses many times over the amount that’s likely to realize. I don’t begrudge the revenue. As Russell noted above, it’s the time, the total cost.
Michael says:
Monday, July 19, 2010 at 13:09
“It seems to be exactly as bad as Doug says.”
Apart from hotel bills does anyone have any other examples where someone running a small business is not going to have accounts and/or receive bills with the vast majority of his “vendors” because given the tightness of margins in most small businesses it’s inconceivable to me. There are just not material areas of expenditure taking place in left field.
Oh dear, a few friends of mine will be unemployed shortly then, and their businesses closed. These are small shops, not “mom & pop” shops, but “mom & another mom” that employ a few other moms too!
Two trade shows (each a week long, one in Florida and one in California) that’s over $600 there. They buy their store stock from a distributor, but would each manufacturer need a form? And the distributor, they consolidate orders from several stores in their territory, just the small circle of friends I can see most going out of business over the paperwork requirements.
As a CPA commenter on one of my blogs said, “If this rule stands as is, I predict this will be the most widely ignored IRS statute in history.” The question would become how vigorously they’d prosecute the inevitable glut of scofflaws.
Thank you, Sam, for bringing some specific action items to the table. I’ll write a note today.
sam says:
Monday, July 19, 2010 at 13:19
Based on this info in italics this whole hoo haa sounds like another exaggeration. Any comments Doug?
For those of you who will miss my most recent comment in this thread:
Does this allay some anxiety?
sandra says:
Monday, July 19, 2010 at 13:26
“They buy their store stock from a distributor, but would each manufacturer need a form?”
They’re running a business and they don’t record their cost of goods or cost of sales?
“Apart from hotel bills does anyone have any other examples where someone running a
small business is not going to have accounts and/or receive bills . . .”
That’s not the right question. The question is whether they currently receive enough information to prepare the 1099-Misc. form: the proper name, address and Tax I.D. number. I suspect not. I have a small business and what generally gets entered is the Payee, the nature of the expense and the amount. I don’t know what gets entered when I personally pay an expense out-of-pocket and then get reimbursed. It probably shows myself as the Payee. Hard copies of bill and invoices are filed by day of payment. I doubt many, if any, of the bills/invoices contain the Tax I.D. number.
It was never the tracking of expenses that was the concern, it was the filing separate 1099’s for every single vendor, finding and including the tax information about every single vendor, and sending each vendor a copy of said report. It’s easy to give an itemized list of business expenses, it’s another to file dozens (or more) of 1099 forms for every company you’ve done any business with during the last year.
Given that the info in italics is only a proposal, the best you can say it that this whole hoo haa might ultimately end up being another exaggeration. But at the moment, it’s not.
sam, in my experience most businesses don’t use credit cards, they use checks, but my experience may not be common.
“the best you can say it that this whole hoo haa might ultimately end up being another exaggeration. But at the moment, it’s not.”
Well, can we say that at the moment it’s a modified, limited hoo haa?
“It was never the tracking of expenses that was the concern, it was the filing separate 1099′s for every single vendor, finding and including the tax information about every single vendor, and sending each vendor a copy of said report.”
As Russell points out above this is largely mechanical if you have an account with your vendor. All his info is on the computer and updated when bills are posted. It would only get complicated in the event of the hotel credit card scenario coming to pass, and it looks as if that’s history.
Hmmm….lawyers making business for more lawyers. Makes sense to me!
PD Shaw says:
Monday, July 19, 2010 at 13:40
“The question is whether they currently receive enough information to prepare the 1099-Misc. form: the proper name, address and Tax I.D. number. I suspect not.”
You don’t have the name and address of your vendor? Are you kidding? Now I can conceive you might not have their tax id number but getting it doesn’t seem a major problem but no name and address?
Rebecca,
Ssshh, we’ve got this great scheme worked out and you’re gonna ruin it 😉
Obvious troll is obvious.
Go away Joe if you can’t help being such a dingbat.
I think this looking more like a tempest in a teapot, per sam’s quote … but I wonder, how many here are decrying this who have also, at one time or another, supported VAT?
The reporting on this is essentially on the path to VAT-level reporting, in which every transaction between vendors would have to be analyzed for tax purposes.
(I continue to dislike VAT.)
Brummagem Joe, the link to Doug’s post identified precisely the situation in which the actual vendor’s name may no be recorded — third party payments, such as to banks and other fiduciaries. Recording the payee is not necessarily the same as having the correct name of the vendor, particularly when the vendor is closely affiliated with other businesses or utilizing an assumed name.
And on my desk I have a receipt for a day’s parking ($42) that I paid in cash, for which I have no name or address. It’s just a cash register receipt with the date, amount paid, and the words “parking” on it. I would have asked the attendant for the tax i.d., but I don’t think he spoke English.
Steve Verdon says:
Monday, July 19, 2010 at 14:36
“Obvious troll is obviousGo away Joe if you can’t help being such a dingbat.”
Well I can see you’ve never run a business because if you had you’d know that you don’t pay invoices without name, address, telephone etc of the vendor.
PD Shaw says:
Monday, July 19, 2010 at 14:58
“.And on my desk I have a receipt for a day’s parking ($42) that I paid in cash, for which I have no name or address. It’s just a cash register receipt with the date, amount paid, and the words “parking” on it.”
And you’re planning to spend over 600 bucks a year with this parking garage are you?
“or utilizing an assumed name.”
See above comment about why you get full info on invoices. Quite honestly you’re making mountains out of molehills to justify an argument which outside of a very narrow set of circumstances seems largely specious.
Joe,
My point was that you are trolling. You made it sound ridiculous that a business wouldn’t know a vendors name and address, which is reasonable in some cases. However, PD Shaw also included the Tax ID which previously wouldn’t be necessary in certain cases…that is trolling. You are just being deliberately obtuse. PD has now pointed out where even getting the actual name may also be problematic as well.
My running a small business or lack-there-of is irrelevant to calling out your trolling attempts. So far in this thread you’ve been wrong just about everywhere save the trivial.
Here is an example Joe,
If PD parks there for 15 days over the course of a year he’ll spend $630 and he’ll need the name, address and tax ID number for the company that runs that parking garage. Is it easily obtainable? PD says not really.
So, PD will have to do extra leg work to find that information…that is time spent not making money/adding to the economy.
The parking garage might decide to put up such information if they get enough requests. That is time and money diverted from the economy.
The parking garage might have an employee who’s time is now diverted from adding to the economy as well.
In economics these kinds of losses are called Deadweight Loss.
“Thus, business purchases made with payment cards will be exempt from information reporting under section 6041.”
Why are we still talking parking?
(If this goes through, I can see that one goal is to push those cash transactions onto _either_ 1099 or payment card. Both cure the problem of “he was a carpet cleaner for 40 years, funny how he never showed a profit.”)
In other words, using legal tender becomes an almost implicit crime punishable by increased bureaucratic Bravo Sierra.
There was a story that floated around, about a study group of SciFi authors asked to describe how the then-Soviet Union could completely track and control its citizens. The answer was debit cards, and no more cash.
So sure as someone who leans libertarian, a movement to track businesses by transaction card or 1099 is worrying. It doesn’t extend to individuals (yet), but still.
Of course, as an honest tax payer (and 1040-C filer) have I been a dork covering for all those cash businessmen who don’t?
I’m not sure my libertarian streak should really extend to holding the bag for cheaters.
Oh, also note that Greece’s problems in part trace to too high a percentage of the population being tax cheats. At a certain scale, it can destroy an economy.
“My point was that you are trolling. You made it sound ridiculous that a business wouldn’t know a vendors name and address, which is reasonable in some cases.”
It IS ridiculous to claim it’s difficult to source a vendor’s name, address, tel number etc when it’s accounts payable 101 that you don’t pay invoices that don’t have this info and your total ignorance of this basic fact is highly relevant. I also acknowldedged that tax ID might be more problematic in the case of small vendors but if there’s a change in the system it isn’t going to be long before they become automatic on all invoices. And since name calling seems to be all you can do, please regard this as the last time I’m going to put you straight.
B.J.: You know something because of your past experience consulting, but you don’t know anything about a small business of more than one person. You believe that vendor has some narrow meaning (i.e., vendor = account), when it does not. You almost never read the links offered in the original post or offered by commentors. I won’t read you anymore; you can insult others; I actually have a small business to run.
PD Shaw says:
Monday, July 19, 2010 at 20:22
“B.J.: You know something because of your past experience consulting, but you don’t know anything about a small business of more than one person.”
Not exactly. I started a small business forty years ago and sold it when it was medium size business. When I retired I was running several companies. Would you like to give me some examples of where I’ve called anyone any names or insulted anyone since I rigorously avoid it unlike some posters here. All I’ve done is state some basic business101 facts which you seem uncomfortable with. And you don’t need to tell me what I believe a vendor is because I know exactly and here’s definition.
” A vendor, or a supplier, is a supply chain management term meaning anyone who provides goods or services to a company.”
How exactly does your understanding of the term differ from mine? I’ll await your answer.