In order to raise revenue without raising taxes, part of the Patient Protection and Affordable Care Act (PPACA) included some provisions that have had business owners up in arms since the act was signed into law last year.
Small businesses were facing mountains of paperwork, thanks to a requirement contained in the PPACA requiring them to submit Form 1099 to the IRS for all purchases of goods and services of more than $600 annually, regardless of what businesses were purchasing.
“With all the attention paid to this issue, businesses need to know the facts about the reporting requirement’s repeal, as this relates to most all businesses, including non-profits,” says Mike Pine, senior manager at Crowe Horwath LLP. “They should also be aware that there are still some penalties included in the PPACA relating to the repealed legislation that shouldn’t be ignored.”
Smart Business learned more from Pine about the repeal of the Form 1099 requirements in the PPACA and what it means for businesses.
What new reporting requirements were businesses facing with the PPACA?
Signed into law in March 2010, the ‘health care act’ contained a number of components that would have imposed a greater burden on businesses in terms of paperwork and cost. One of these mandates was the expanded Form 1099 reporting requirement, which was enacted as part of the Small Business Jobs Act of 2010, and was in addition to the 1099 reporting requirements imposed on taxpayers who receive rental income.
The additional rules included in the PPACA were going to require any business that made payments of $600 or more per year to any recipient, including payments made for property, to file Form 1099 for each recipient beginning after Dec. 31, 2011. Also, rules included in the Small Business Jobs Act would have required any business making payments of $600 or more to any service provider while earning rental income to file Form 1099 with the IRS and the service provider.
Naturally, businesses and members of the accounting community raised concerns about the additional time and effort that would be required of taxpayers if these requirements were enacted.
What does the repeal of the 1099 legislation mean for businesses?
In April of this year, the president signed legislation that repealed the new 1099 reporting requirements for payments made to corporations and for payments made for property. Basically, the 1099 reporting requirements are back to what they were before the PPACA and the Small Business Jobs Act, which most business are familiar with.
However, the increased penalties portions of the aforementioned legislation were not repealed, so the penalties are now much stiffer than they used to be.
Under the old rules, the penalties for failure to timely file a Form 1099 ranged from $15 to $50 per form, with an annual maximum ranging from $75,000 to $250,000, depending on how late the forms were filed. Under the new rules, the penalties per late filed Form 1099 range from $30 to $100 per form, with an annual maximum ranging from $250,000 to $1.5 million also depending on how late the forms are filed. In addition, the minimum penalty for each failure to file due to intentional disregard increased from $100 to $250.
The increase in the annual maximum should be a real concern to taxpayers. Some small businesses with average annual gross receipts of less than $5 million, however, may be able to take advantage of smaller annual maximum penalties ranging between $25,000 and $50,000.
How can businesses make sure they are avoiding undue taxes and penalties surrounding the PPACA and Small Business Jobs Act?
Because the penalties for failing to comply with these rules can get out of hand quickly, it is important that businesses either have a comprehensive understanding of these rules and procedures in place to ensure adherence to them or that they regularly consult with their CPA to do the same.
What else should business owners do to prepare for and/or mitigate risks associated with this issue?
Considering that taxpayers now face a maximum annual penalty of up to $1.5 million for late filing of Form 1099, this may be an area that businesses should revisit, especially if they have deemed in the past that the risk wasn’t material enough for them to make an investment in their compliance planning and adherence model. This is one of those areas in tax where it may save taxpayers a lot of money to spend the time and resources in advance to make sure they are in compliance of these rules rather than figure it out after it is too late and be stuck with a very large penalty due to Uncle Sam.
These are complex issues, and businesses should consult with a qualified CPA who is familiar with their industry and the steps they should take to avoid financial or filing burdens.
Mike Pine is a senior manager with Crowe Horwath LLP. Reach him at (214) 574-1042 or [email protected]