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What 1099 Reporting Rule Repeal Means to Small Business

Okay, small business owners just dodged a bullet. Chalk one up for common sense. The insane expansion of 1099 reporting hidden in 2010’s massive health care reform bill is now toast. President Obama put a stake in its heart on April 14.

Expansion of mandatory IRS 1099 form filing would have required every small business to file such a form for business-to-business transactions totaling $600 or more over the course of a year.  While businesses already must file 1099s for payments to individuals and independent contractors, this provision represented a giant escalation of the IRS campaign to close the so-called “tax gap” by putting a further squeeze on small business owners. [Also see New SBA Study says IRS Small Biz Audit Crackdown is Bogus.]

The expanded rule would, for the first time, have included payments currently exempted from the provision, such as those to vendors for merchandise and similar items. What’s more, under the now-defunct rule, individuals owning as few as one rental property would have been considered a “business” and required to file 1099s.

Needless to say, the filing burden would have gone through the roof, as business owners would also have been forced to collect tax IDs from every person or business they paid money to. And if they couldn’t get it, they would have been required to withhold federal income taxes and send the money to Washington.  In general, it was nuts.

But a public outcry, and some deft lobbying by the National Federation of Independent Business (NFIB), brought lawmakers back (briefly, at least) to planet Earth long enough to repeal the 1099 reporting provision. “The 1099 provision was so illogical, and so burdensome, that it was quickly identified as a must-repeal not long after the health-care law was signed into law last spring,” says Dan Danner, president and CEO of the NFIB. “But it took Congress more than six months to get this simple job done. They lingered over it, savoring the repeal effort in a way that only a politician can.  The process was deliberately prolonged by casting multiple votes for symbolic bills before voting on a piece of legislation that actually guaranteed repeal.”

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