Repeal of 1099 rule seen as helping small business

Local accountants and their small-business clients are breathing huge sighs of relief these days, and it has little to do with the tax season drawing to a close.
The sense of relief comes after Congress repealed a provision that would have required for the first time that all companies report to the IRS any payments to vendors and service providers that exceed $600 a year.
When it was first passed as part of the sweeping health care overhaul bill last year, the mandate was intended to help the government track down previously unreported income tax, an estimated $2 billion annually.
But accountants and business advocates predicted it would be a nightmare for businesses that would be buried in an avalanche of 1099-MISC forms traditionally fired by companies that have hired unincorporated outside contractors providing services, such as freelance photographers and writers.
So news that the House and Senate soundly overturned that section of the health care bill was greeted happily by local CPA firms.
“[Small-business owners] really dodged a bullet,” said Paul Oliveira, director of the tax- services group at Providence-based Kahn, Litwin, Renza & Co. Ltd.
John E. Finnerty, a principal at Lefkowitz, Garfinkel, Champi & DeRienzo P.C., said the staff members were bracing for a lot of handholding and counseling for its clients if the new 1099 rules had gone into effect in 2012 as originally planned.
“There would have been a lot of time and effort,” he said.
Yet there could be a downside to the reversal of the law. Some tax experts predict that the IRS may now step up its enforcement of other tax laws in an effort to drum up more revenue.
But for now, those involved with assembling business tax returns have been celebrating the defeat of what many called an “onerous” 1099 rule.
The new requirement would have expanded 1099 reporting in several ways: It would have included payments to incorporated businesses, and payments for goods. Also, individual taxpayers who receive rental income would have been required to report it through 1099 forms.
That would have meant, for example, a small business that bought more than $600 worth of office supplies in a year’s time from a local store would have been required to file a 1099. If the same company hired an IT firm to maintain its computer network, it would have had to file another 1099.
“The burden would have been unbearable and an administrative nightmare,” Finnerty said. Even though implementation of the 1099 rules was still nearly a year away, many accountants were already advising their clients to be prepared by collecting data such as tax ID numbers from vendors they expected to do business with in 2012.
The move to repeal the 1099 regulations gained momentum earlier this year with President Barack Obama promising in his State of the Union address to fix unnecessary burdens on business, even though the billions of dollars in unreported income tax it was supposed to capture was intended to help finance the president’s health care reform measure, the Patient Protection and Affordable Care Act.
The repeal also changes the Small Business Job Act, which expanded the requirement of 1099 filing to those receiving rental income.
After several hours of partisan debate on March 3, in which some Democrats argued that the repeal would raise taxes on middle-class Americans, the House approved overturning the new 1099 rules, 314-112. Rhode Island Reps. James R. Langevin and David N. Cicilline, both Democrats, supported the repeal.
A month later, the Senate approved the same measure, 87-12. Rhode Island Democratic Sens. Jack Reed and Sheldon Whitehouse voted in favor of the repeal, even though both opposed a similar measure before the Senate in February.
Last week, the legislation was headed to Obama for his signature.
Oliveira said the more stringent 1099 rules might have added “incrementally” to the fee income for Kahn, Litwin, Renza & Co. and other CPA firms. But the repeal was far better for their clients.
Some experts say they believed the government’s estimates of how much additional tax revenue would have been collected in the wake of more stringent reporting requirements – more than $2 billion annually – were overstated.
Gregory Porcaro, a CPA at Otrando, Porcaro & Associates Ltd. in Warwick, said it appeared estimates were based on assumptions that compliance levels would be high immediately, which from Porcaro’s experience would not have been the case.
Porcaro said he suspected that the IRS will enter into a more “heavy-handed” mindset of the past, as the agency becomes more active in checking for compliance among small businesses and high-wage earners.
“I think they need money,” Porcaro said. “And they’re going to get what they have to get.” &#8226