Senate Fails To Cut Tax Provision

The Senate rejected an amendment Tuesday that would have cancelled a new requirement of the health care overhaul. And so a little-noticed provision of the law lives on: Small businesses must file a 1099 form with the Internal Revenue Service if they buy supplies or services worth more than $600 from a vendor.

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Meanwhile, the president today avoided what would have been a serious political setback. The Senate defeated the first major effort to repeal a section of the new health care law. But what was at stake was a provision that doesn't actually have anything to do with health care. It's a new paperwork requirement that's got the business community up in arms.

NPR's Julie Rovner explains.

JULIE ROVNER: Right now, when a business buys services worth more than $600 from an unincorporated business. It has to file a form 1099 with the IRS. That's to make sure the recipient reports the income, too, and pays taxes on it. In an effort to raise money to help pay for the new health law, Congress decided to make businesses file more 1099 forms to boost tax compliance - a lot more.

First, starting in 2012, they'll have to file 1099 forms not just for unincorporated businesses they pay more than $600 a year, but for all businesses, including corporations. Bill Rys is tax counsel for the National Federation of Independent Business.

Mr. BILL RYS (Tax Counsel, National Federation of Independent Business): You know, your telephone services are coming from a corporation, airline services, so it's a pretty big expansion.

ROVNER: But that's not all. The health law requires businesses to file 1099 forms not just for services, but also for goods or property that costs more than $600. So if you're a freelance writer who buys a new computer from Best Buy, you'll have to send Best Buy a 1099 at the end of the year. Rys says it's going to be a huge headache, particularly for small businesses.

Mr. RYS: It's going to be a lot of new paperwork. It's gonna be a lot of new time spent on tracking down information. The tax payer identification number of your vendors and on the backend of that you're going to have new questions from the IRS.

ROVNER: The message that is going to be a lot of paperwork has gotten through to business owners and in turn, back to their elected officials on Capitol Hill. No one is happy about it. On the Senate floor today, Republicans finally got a chance to try to vote the new requirement into oblivion. Mike Johanns of Nebraska sponsored the amendment.

Senator MIKE JOHANNS (Republican, Nebraska): You see, I think it's time Washington listened to the concerns of constituents and businesses. They sure didn't do that with the health care bill.

ROVNER: But Democrats, who in retrospect aren't very happy with the new paperwork requirements either, objected to the way Johanns wanted to make up the $19 billion hole that repealing the requirement would create in the health law. He would've watered down the requirement that most people have health insurance, starting in the year 2014. For people like Montana Democrat Max Baucus, who wrote the health bill, that was a non-starter.

Senator MAX BAUCUS (Democrat, Montana): Johanns amendment would raise health insurance premiums - raise them. The Johanns amendment will result in fewer people having health insurance - fewer.

ROVNER: Enough Democrats stuck together to vote down the Johanns amendment. But Democrats recognized just how unpopular the new 1099 reporting requirements are, so they came up with a proposal of their own, offered by Florida's Bill Nelson. Exempt small businesses with 25 or fewer workers and raise the reporting threshold from $600 to $5,000.

Senator BILL NELSON (Democrat, Florida): So in tightening up the law, we're going to get people to pay their income tax, but we're gonna do it in a way that is not harassing any business, but particularly small business because we're gonna exempt them.

ROVNER: Republicans, however, not wanting to let their opponents off the hook for something everyone agrees is highly unpopular, voted down the Nelson alternative, which leaves the paperwork requirement in place just in time for the midterm elections.

Julie Rovner, NPR News, Washington.

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