No fix yet for health reform's 'paperwork nightmare'

September 20, 2010

Triangle Business Journal

Kent Hoover

Small businesses lost their first attempt to repeal a new paperwork burden imposed by health care reform, but both Republicans and Democrats agreed the bill's tax-reporting requirements need to be changed.

In order to raise $17 billion to help pay for the cost of the legislation, the health care reform law requires businesses -- beginning in 2012 -- to file 1099 forms with the Internal Revenue Service any time they spend more than $600 a year with another business for goods and services. The theory is that third-party reporting of payments made to businesses will make these firms less likely to hide this income from the IRS.

The 1099 requirement now applies only to payments made to unincorporated service providers. Expanding this to all types of businesses and all types of purchases will dramatically expand the number of 1099 forms that small businesses will have to file, even though the IRS plans to exempt payments made by credit cards from the reporting requirement.

In order to get the 60 votes needed to proceed with legislation designed to increase the flow of credit to small businesses, Senate Majority Harry Reid, D-Nev., scheduled votes Sept. 14 on two amendments that would address the 1099 issue. Republicans supported an amendment that would repeal the requirement. Most Democrats, however, favored an amendment that would exempt businesses with 25 or fewer employees from the requirement, and raise the reporting threshold for other businesses to $5,000 for purchases of goods.

Both amendments fell short, however, of the 60 votes needed to clear procedural hurdles. That means the 1099 issue remains unresolved, and most likely will continue to a hot-button issue for small businesses through this year's congressional elections and into the next Congress.

Business groups criticize Senate
Both the National Federation of Independent Business and the U.S. Chamber of Commerce criticized senators for failing to repeal the 1099 reporting requirement.

"Those who voted against full repeal must think it's appropriate to punish all small business owners with needless and costly new paperwork for the slight possibility that this new reporting requirement may help the government capture some unreported revenue," said NFIB Senior Vice President Susan Eckerly.

"No 'alternative' meant to provide political cover ends this paperwork nightmare," she said.

Bruce Josten, the chamber's executive vice president for government affairs, said the failure to repeal the 1099 reporting requirement will force small businesses "to spend precious time and resources reporting to the federal government rather than producing, growing and creating jobs for Americans."

"In this economy, there is little defense for supporting oppressive regulations on small businesses that will hamper their ability to put people back to work," Josten said.

Sen. Mary Landrieu, D-La., who chairs the Senate Small Business and Entrepreneurship Committee, delivered this message to NFIB, the chamber and other business groups: "We've heard you," she said. "We're going to fix it."

Landrieu said she will introduce legislation that not only repeals the health care reform's bill expansion of the 1099 reporting requirement, but exempt more businesses from the current requirement as well.

"We're going to find a way to pay for it that both sides can agree to," she said.

Each 1099 fix has problems
The repeal amendment offered by Republicans was "a joke," Landrieu said, because it would undercut health care reform by making more individuals exempt from the mandate to obtain insurance coverage. The amendment would allow people who would have to pay more than 5 percent of their income on health insurance premiums to remain uninsured without facing a penalty. The law's current exemption threshold is 8 percent of income.

This change in the threshold would lead 2 million people to opt out of health insurance coverage, Democrats contended. This would lead to higher premiums for everyone else, they said.

The Republican amendment also would delay funding of wellness and prevention programs until 2018.

Republicans, meanwhile, contended the Democratic amendment wouldn't solve the 1099 paperwork problem. Some businesses would avoid hiring more than 25 workers, in order to stay exempt from the 1099 reporting requirement, they contended.

For businesses with more than 25 workers, the 1099 requirement would become even more complex under the Democratic amendment, according to Republicans. Businesses would have to track purchases of goods and services separately, since each type of purchase would be subject to different 1099 reporting thresholds.

Business groups also opposed the Democrats' method of paying for their 1099 reforms: an $8 billion tax increase on domestic energy producers. This would mean result in higher energy prices, they contended.

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