By Barbara Pash
A controversial new federal law that begins to take effect in January would create a “paperwork nightmare” for thousands of Maryland businesses by drastically increasing the number of 1099 tax forms they have to file, business groups and accountants say.
This provision was tucked into the comprehensive health care bill passed earlier this year by both houses of Congress — even though it has nothing to do with health care. Professional groups and trade associations are calling for its repeal. U.S. Sen. Max Baucus, a Montana Democrat who chairs the Senate Finance Committee, introduced a bill to get rid of it. Maryland Democrat Sen. Benjamin Cardin is one of the bill’s co-sponsors.
The bill was not voted on before Congress took the week off for Thanksgiving, but many people working on behalf of small businesses, accountants, and entrepreneurs are hoping that the repeal will become a reality soon.
“We are working hard to get this provision repealed,” said Stephanie Caphcart, spokesperson for the National Federation of Independent Business, a national organization headquartered in Washington, D.C., and the largest small business association in Maryland.
The new law expands reporting requirements for business payments for property and services. Under the new law, purchases of $600 or more during the course of a year from a single vendor — even a major supplier such as Staples or Verizon — need to be reported with federal tax form 1099.
J. Thomas Hood III, executive director of the Maryland Association of CPAs, gives the U.S. Congress the benefit of the doubt for creating the law. The intent “was well meaning. It wanted to close the tax gap between what is reported and actual income,” he said. “But a lot of that is illegal activity, and it’s not going to be reported on a 1099.”
Basically, when a business spends $600 or more with a single vendor, it would be required to fill out two 1099 forms, sending a copy each to the vendor and to the Internal Revenue Service.
The Maryland Association of CPAs has 10,000 members – half in small and midsize businesses, the other half in public accounting firms. A recent survey found members unanimously agreed that the new requirement “has created an extremely costly compliance burden,” Hood said.
He explained: “If you’ve bought $600 worth of office supplies from Office Depot [during the year], you’re going to have to send a 1099 to Office Depot and a 1099 to the IRS. We estimate it could increase the number of forms a business is filing by literally everyone it does business with.”
Caphcart said her group “raised the flag on this early,” and has been lobbying on Capitol Hill for its repeal.
Under the current law, she said the tax filing requirements were mostly manageable for small businesses. She called the new provision “a paperwork nightmare,” noting that “for every business-to-business relationship, you must generate a pair of 1099s.”
In a recent study of National Federation of Independent Business members, many said tax compliance paperwork is their most costly expense, Caphcart said. “And that’s before this new provision goes into effect.”
Allen DeLeon, chair-elect of the Maryland Association of CPAs, said he is not sure whether the IRS is ready for the impact of the new law.
“I doubt the IRS has the capability to process all of the 1099s this is going to generate,” said DeLeon.
As it stands now, businesses will need to start filing the 1099s for payments made in January. DeLeon, who works with the Gaithersburg accounting firm DeLeon & Stang and is a member of the Maryland Chamber of Commerce’s tax committee, said businesses are going to have to start tracking all of their payments in less than two months if they want to comply with the law.
The Maryland Chamber of Commerce is also fighting for the law’s repeal, DeLeon said. Hood said that both the national and the Maryland CPA associations are opposed to the provision.
“It’s an extra burden and at a time when small businesses are in a fragile condition,” said Hood.