DATELINE: September 14, 2010, Chicago
The Obama Administration faces a significant challenge in the Senate today. Our elected officials are being asked to repeal Section 9006 of the Patient Protection and Affordable Care Act, otherwise known as the health care reform legislation passed earlier this year by Congress. The Administration is scared to death. This may only be one provision in a bill containing hundreds of them, but it represents the proverbial camel’s nose under the tent.
So what’s all the fuss about? Surprisingly, a provision that has nothing to do with health care. In order to pay for the legislation, Speaker Pelosi and her colleagues inserted a provision that would extend Form 1099 reporting requirements to corporations. While the provision leaves payments to Section 501(a) organizations outside its grasp, it does not exempt Section 501(a) payors from its grasp--at least that is how everyone seems to be reading the legislation.
Speaker Pelosi also expanded the payments that must be reported on a 1099. While Section 6041(a) of the Internal Revenue Code applied to more payments than those for services provided by an individual, it did not extend to payments for goods. Thanks to Speaker Pelosi and her colleagues,...
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it does beginning January 1, 2012.
So what does that mean for charities and other tax-exempt entities? Quite simply: Beginning January 1, 2012, these organizations will need to prepare and file 1099s for purchases of goods from a vendor if the total purchases during the year from the particular vendor exceed $600. So if a social services agency buys a $1,200 computer from Dell or HP, it must file a 1099 for the purchase. If a museum has lunch meetings at a restaurant down the street and the total paid for all lunches equal or exceed $600 during the year, it must file a 1099. If a school uses a corporate credit card to pay for gasoline purchases for its vehicles at the local service station down the road and those purchases equal or exceed $600 during the year, it must file a Form 1099. And don't forget the fun that comes with backup withholding if a payee fails to provide required information.
It’s not the filing that is so problematic, although there are costs to the act of filing. The significant costs will be associated with collecting information. First, the organization will have to request the information from the vendor (name, address, EIN or TIN). Second, the charity will need to track purchases in anticipation of determining whether the recipient of the payments received $600 or more in payments. Many charities and other tax-exempt entities that aren't required to file returns electronically will be required to put in place the mechanisms for doing so if the total number of information returns exceeds 249. And you think IRS Director of Exempt Organizations Lois Lerner is tearing her hair out over Form 990-N. She'll need a wig once the new information reporting requirements are fully operational. [Actually, Lerner probably won't be directly involved in implementing the new provisions, but she undoubtedly will be involved in communicating information to her customer base].
Speaker Pelosi and her colleagues believe this burden is necessary to close the tax gap. You can say what you want about the integrity of Corporate America, but we have serious doubts that the members of the Fortune 500, Wilshire 5,000, or most other corporations with audited financial statements are underreporting sales.
There are two bills vying for the Senate’s attention. The Republican bill would repeal the requirement outright. Under a bill introduced by Democratic Senator Bill Nelson, the provision would be modified, eliminating the reporting requirement if payments were under $5,000 per annum. Moreover payors with fewer than 25 employees would be exempted from compliance. We also understand that this or another bill floating around would exclude payments made by credit cards (we’ve seen debit cards mentioned in some descriptions).
The Nelson alternative doesn’t do much good in terms of recordkeeping. Organizations would still have to track payments to each payee to determine whether the $5,000 threshold had been exceeded. And there are lots of tax-exempt entities with more than 25 employees, particularly because the legislation doesn’t distinguish between full- and part-time employees. An exception for credit cards has a superficial logic to it, but we don’t see such this exception as the panacea many believe it to be. It will undoubtedly move charities in the direction of credit payments, thereby eliminating discounts for cash payments and subjecting charities to credit card processing fees. At a minimum, an exception of this type should be applicable to any payment processed through a third party--check, debit card, credit card, wire transfer, and payment exchanges such as PayPal.
[UPDATE 1:45AM CST, SEPTEMBER 14, 2010--Both proposals were defeated]
At the end of the day, the Republicans have the right approach—outright repeal of this burdensome and costly provision. As usual, the two sides of the aisle are unlikely to reach a compromise. According to the New York Times, the Democrats pay for their modification to the provision by eliminating a deduction available to the five largest oil companies, while the Republicans pay for the their measure by eliminating some of the health care spending envisioned by the health care reform legislation. Robb Mandelbaum, Will Congress Ease 1099 Requirements in Health Care Bill (August 9, 2010). If there is an impasse, charities and businesses will incur the burdens that Speaker Pelosi and her colleagues brought about under cover of night—“You’ll find out what’s in it after we pass it.”
One of our friends in the tax community is convinced that there is plenty of time to fix the provision--over a year away from the effective date. We reminded this him about the current state of the estate tax and the fight over making the Bush tax cuts permanent.
While the U.S. Chamber of Commerce and its politics may disgust many nonprofit leaders, health care reform has created some strange bedfellows. We would urge social service agencies, health care institutions, museums and theatre companies, and hundreds of thousands of other tax-exempt entities to join the U.S. Chamber of Commerce’s efforts to repeal Speaker Pelosi’s folly. It’s time that these folks get to know the U.S. Chamber of Commerce. As health care reform rolls out, we suspect that the nonprofit community will find that the U.S. Chamber of Commerce to be a worthy ally. The rubber has hit the road.
Internal Revenue Service - Circular 230 Disclosure: As provided for in Treasury regulations, any advice (but none is intended) relating to federal taxes that is contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.
THE FOREGOING IS NOT AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. IF LEGAL ADVICE IS REQUIRED, THE NONPROFIT OR OTHER PARTY IN QUESTION SHOULD SEEK THE ADVICE OF QUALIFIED LEGAL COUNSEL.
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