As part of its plan to reduce the availability of credit after the real estate housing bubble of 2003-2007, Congress has been at work to give the IRS more control over how financial transactions are conducted in the United States.

Many are aware of the primary mandate of the new health care bill. However, most do not know of the other mandate included. It has a much greater impact on credit availability for the future.

Tax Code Changes.

1099 reporting has been changed. All it took was a few word changes to tax code section 6041. It ws slipped into the 2000-page health legislation, probably under the belief that by the time anyone learned of this, it would have already been signed.

Beginning in 2011, the changes require businesses to issue additional IRS Form 1099s every year. This will affect millions of businesses. It will generate hundreds of millions, if not billions, of additional documents that private business must send each year. It seems to be a costly requirement that will affect the ability of businesses to extend credit.

What Easy Credit Allowed.

Banks made credit easily available over the last decade. That created an environment where many businesses, individuals (like you and I), and governments had easy access to many products and services that were difficult to access previously.

You could get homes, cars, elective surgery, trips & vacations, home improvement, rental property, and much more than you could in previous decades. Businesses were able to expand using credit by buying inventory, improving their stores, and offering easy credit terms to customers. Governments used easy credit for roads, sewer, sidewalks, parks, schools, police and fire, and more.

Reducing Credit Step-by-Step.

Once the financial system collapsed in 2008, it became clear that credit needed to be drastically reduced for the banks and financial institutions to survive. This resulted in bailouts of not only private companies, but also semi-private ones like Fannie Mae and Freddie Mac. To give these lenders a chance to survive, the first step was to reduce credit by making fewer options available to individuals.

The second step was to reduce credit available from businesses. Whether it is the retail outlet giving you a store card or a car dealership offering easy credit terms or your doctor putting you on a payment plan for elective surgery, these sources of credit need to become less available if the banks are to survive.

To help reduce credit available from businesses, which compete with banks and financial institutions, the Federal government has made it more costly for businesses to offer anything of value without alerting the IRS.

The new legislation reduces competition by making private business credit more expensive compared to bank credit. An individual seeking credit has greater incentive to use a bank rather than going directly to a product seller, due to banks lower costs in handling IRS reporting requirements. Business credit will be outpriced by bank credit.

How Will The New Legislation Work?

Currently, businesses issue 1099s in a limited set of circumstances. For example, when a business pays an outside consultant, a 1099 is issued. With passage of the health care bill, this information reporting requirement is greatly expanded. These additional IRS requirements place a cost on doing business which impedes their ability to offer credit except to their largest and most stable customers, due to the cost of reporting.

Examples of New Reporting Requirements.

A 1099 must be filed for…

• “amounts in consideration for property” (Code Sec. 6041(a) as amended by 2010 Health Care Act §9006(b)(1)) and
• “gross proceeds” (Code Sec. 6041(a) as amended by 2010 Health Care Act §9006(b)(2))

if the $600 aggregate payment threshold is met in a tax year for any one payee. After 2011, “payments” includes gross proceeds paid in consideration for property or services.

Increased Cost from New Requirements.

A 1099 will have to be issued whenever a business does more than $600 of business with any entity in a year. Given this requirement, business credit will become much more expensive in the upcoming years.

How Do You Prepare?

Take advantage of cheaper bank credit and available business credit, while prices are still low. The time is coming when both will become much more expensive and probably for years to come. Business credit will be more expensive due to reporting costs from the new legislation. Bank credit will be more expensive due to reduced competition from business credit.

If you take advantage of credit (whether bank or business) today, be sure your credit reports are in good shape. You may need to get a credit report or credit monitoring to make sure you still have access to credit at the lowest possible rates.

Use credit for long-term, durable, high-demand, and high-quality purchases. DO NOT use credit for trendy, brand-name, high-maintenance, impulse items. Using your existing access to credit the correct way will pay huge benefits when credit becomes expensive and hard to get,

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