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Tax rule that would've hurt small business is repealed

All businesses would have had to file tax forms for every person or company with whom they did more than $600 worth of business in a year. Small businesses protested, saying they would be buried in paperwork, so Congress is reversing course.

April 06, 2011|By Sharon Bernstein, Los Angeles Times

Congress has repealed a tax provision that small businesses said would have buried them in paperwork and forced them to pay for hours of extra accounting services.

The provision, passed last year as a way to raise money to pay for healthcare reform, would have forced all businesses to file special tax forms to report anyone with whom they did more than $600 worth of business in a given year.

The repeal was welcomed by small-business owners and advocates across the nation, who had fought hard to push Congress and the White House to withdraw support from a measure that President Obama had initially favored.

"This would have been an administrative nightmare for small business," said Scott Hauge, a small-business advocate who runs an insurance brokerage in San Francisco. Had it gone into effect as planned next year, Hauge's firm would have had to process 700 of the forms, up from 25 that he has to file currently, he said.

Hauge said he had never seen an issue galvanize the small-business community as quickly or as powerfully as this.

When the provision was initially passed, the Obama administration said the additional paperwork would help the IRS track down people and companies who were not paying all of the taxes that they owe, and would raise $17 billion over 10 years to help pay for the massive healthcare overhaul.

But small-business owners reacted immediately, saying that the measure was unwieldy and unfair. It would have required businesses to send a tax form known as a 1099 to vendors, retailers, utility companies and any other entity they'd contracted with. They also would have had to file a copy of the form with the IRS.

By contrast, the law had previously only required that such forms be filed for freelance workers and others who had been hired as independent contractors.

Because of the outcry, the administration reversed course and agreed to support a repeal. Obama spokesman Jay Carney suggested that the president would sign the bill when it reaches his desk.

"We are open to working with Republicans and Democrats to improve the health reform law, and we are pleased Congress has acted to correct a flaw that placed an unnecessary bookkeeping burden on small businesses," Carney said in a news release Tuesday. "Small businesses are the engine of our economy, and eliminating the 1099 reporting requirement is the right thing to do."

Joseph Czyzyk, the chairman of the Los Angeles Area Chamber of Commerce, said he hopes the repeal means that Congress and the administration will curb its focus on the business community in its efforts to look for tax cheats.

"They're looking in every mouse-hole to see where people may be cheating on taxes, as if that's the way to increase revenue in this country," Czyzyk said. "The Chamber is very glad both the House and the Senate saw eye to eye and did the right sensible thing."

The measure to repeal the tax provision was authored sponsored by Rep. Dan Lungren (R-Gold River). The Senate passed it Tuesday on a bipartisan vote of 87 to 12 after backers said they had found another way to pay for the lost tax revenue.

sharon.bernstein@latimes.com

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