How Should You Handle the 1099 Dilemma?
by Craig Kuckelman
This little gem from the health-care reform law might go away—or it might not. In the meantime, what should the prudent business owner or manager be doing?
Included among the many complex provisions of the health-care reform legislation enacted last year (the Patient Protection and Affordable Care Act) is a tax provision that expands the Form 1099 filing requirements for businesses beginning with payments made after Dec. 31, 2011. While reporting for 2012 may still seem like a long way off, the tracking process would, by necessity, begin in January 2012.
In general terms, businesses would be required to report on Form 1099 any payments made for goods or services (formerly services, rents, royalties and awards) to recipients (extended to corporate recipients) aggregating $600 or more during a year. In addition, the normal backup withholding requirements
would apply, which would require businesses to obtain proper taxpayer identification numbers from the recipients before making payment to such recipients in order to avoid having to withhold taxes from the payments.
The Treasury Department has estimated that $345 billion in tax revenue is lost each year by virtue of unreported income. Accordingly, the thought is to begin collecting more of those unpaid taxes in order to keep taxes lower for all taxpayers and help pay for health-care reform.
The Office of the Taxpayer Advocate has expressed its concern that the burdens of complying with the new requirements may turn out to be disproportionate as compared with resulting improvement in tax compliance. Accordingly, it may make administrative or legislative recommendations to modify or replace these information reporting requirements. There have been numerous congressional proposals to revise or repeal the new requirements, including an amendment approved by the Senate on February 2 repealing the Form 1099 reporting requirement. Senator Max Baucus commented, “Small businesses need to focus on creating good-paying jobs—not filing paperwork.”
There are two parts to this reporting: the need to track and report payments for goods (in addition to what was previously reported), and the need to report payments to corporations (not just unincorporated taxpayers). Many small and medium-size businesses may not have the accounting infrastructure to obtain, track, and ultimately report this information to the IRS. The issue of identification is itself burdensome. For example, consider a business which may frequently make purchases from a “brand name” provider of goods or services, but that provider is often a franchisee or a different local owner. Under the new rules, it would be necessary to identify and track such information and provide a 1099 to each individual franchisee or owner.
In addition, small businesses fear the increased reporting burden on large companies could have an indirect adverse impact on them. For example, one small-business commentator is concerned that many businesses will make vendor consolidation decisions in order to reduce their own paperwork burden.
While there is a possibility that some or all of the provisions will be changed, at the time of this writing the expanded provisions remain unchanged. Until thatrepeal becomes official, however, prudent business managers must plan for its provisions, or risk being caught flat-footed if repeal efforts prove unsuccessful. And while there is bipartisan support for repeal of some provisions, the budgetary issue remains how to pay for it. Among the ways to pay for elimination of the reporting burden are calls to reduce spending.
Meanwhile, the issue remains: How do companies prepare for the mandated reporting requirements if the provisions are not modified or repealed? If the new rules become effective as currently scheduled, the process will become more complex and will likely involve procedural, operational, and system changes.
If uncertainty about possible repeal of the provision lingers further into 2011, businesses may want to begin to analyze the data gathering requirements and how to obtain it while giving due consideration to defining other business requirements while awaiting clarifica-tion of the pending provisions. 
This article contains general information only, and Deloitte does not offer it as a means to render any professional advice or services. Before making any decision that may affect your business, please consult a qualified professional adviser. Deloitte shall not be responsible for any loss sustained by any person who relies on this commentary.
Craig Kuckelman is managing partner for the Kansas City office of Deloitte Tax LLP.
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