New law complicates taxes for veterinary practices

AVMA, business groups back repeal of rule passed with health care reform

June 14, 2010 (published)
By Jim Downing

Like other small businesses, veterinary practices stand to face a new tax headache in 2012 under a filing requirement tucked into the federal health care reform law signed in March.

The provision, which is meant to increase the government’s overall tax revenue, requires businesses to file information with the Internal Revenue Service (IRS) on every company to which they pay more than $600 for goods or services in a calendar year.

The new rule is a substantial extension of the existing IRS Form 1099 filing requirement for non-wage workers such as freelancers and consultants. It has riled business groups and the American Veterinary Medical Association (AVMA).

The AVMA’s Board of Governors last month decided to officially support a bill by Rep. Dan Lungren, R-Calif., to repeal the new filing provision. The AVMA also has signed a letter to Congress circulated by the National Federation of Independent Businesses (NFIB) and the U.S. Chamber of Commerce.

Lungren’s bill is not an “active pursuit” issue for the AVMA. Rather, the group is supporting the bill’s passage through a coalition effort lead by the NFIB, said Gina Luke, the AVMA’s assistant director of governmental relations. Each year, the AVMA takes official positions on dozens of bills, she said, but only a handful are typically placed in the “active pursuit of passage” or “active pursuit of defeat” categories.

Current tax rules require most businesses — including veterinary practices — to prepare a Form 1099 for each contract worker paid more than $600 for services in a year. Under today’s rules, a business doesn’t have to file a Form 1099 in connection with payments to a corporation (other than for legal services) rather than an individual. Further, the current filing requirement is triggered only by payments for services, not purchases of tangible goods such as medical equipment or computers.

The new rule eliminates those broad exceptions so that, in general, a veterinary practice would have to file a 1099-type form for every entity to which it pays more than $600 in a year — from the chain store where the clinic gets its office supplies to the pizza place that provides the food for weekly staff meetings.

David Mittenthal, an accountant in South Florida and a Veterinary Information Network (VIN) associate editor, said the new filing requirement appears to be quite broad, extending even to VIN membership fees, which exceed $600 annually for most members.

Jon Dittrich, a VIN consultant who runs a practice management consultancy in Tennessee, said the change stands to burden a small veterinary clinic with additional annual accounting and tax preparation costs in the range of $200 to $500.

Mittenthal and Tom McFerson, a Southern California-based veterinary financial and management consultant, said it’s difficult to quantify the burden because clinics — or their accountants — will likely incorporate the new filing provisions into bookkeeping and tax preparation routines. Clinics already keep track of business expenses and accounting software packages automate the preparation of 1099 forms, they noted. Still, they said, the new filing requirement would create several new tasks, such as collecting tax identification numbers and mailing addresses for every company with which a practice does business.

The rule change was included in the health-care bill as a step toward closing the nation’s “tax gap” — the difference between the amount of tax revenue that ought to flow into the Treasury under the nation’s tax laws and the amount actually collected. The U.S. Government Accountability Office (GAO) has estimated this gap at roughly $300 billion annually. President Barack Obama is continuing a push started by President George W. Bush to close the gap.

Underreporting of business income by small businesses and the self-employed leads to underpayment of taxes equal to about half of the tax gap, according to a 2007 IRS report. The new filing requirement would create a document trail that would give IRS officials another way to assess business revenue.

News of the new filing requirement has prompted vigorous objections in many online forums, including VIN’s message boards.

Dr. John Daugherty, a VIN associate editor who owns a practice in Poland, Ohio, said he has been planning to simply ignore the new provision.

“My plan is just to do nothing until they repeal the law because nobody's going to be able to comply with this,” he said in an interview. “It just seems like a ludicrous amount of paperwork.”

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