Rentals and 1099s

Beginning in just a few days, landlords will have a new complication to renting their properties. As if dealing with renters who don't want to pay their rent or trash the house when they leave isn't bad enough, landlords will have to begin issuing 1099MISC to any service providers they pay $600 or more over the course of the year.

An example: Ann owns a small house that she rents to a young family. This year when Ann hires Dave the plumber to fix a broken bathroom sink, She can just use Dave's invoice (and the check if Dave is paid by check) to document the expense. Ann will use the Schedule E to report the income and expenses she received/paid. The profit or loss from the rental will go against the rest of her income on her 1040 return. Next year, Ann will still use the Sch E to report her income and expense and take the result to her 1040. But she may be required to send Dave a 1099 MISC for the amount she paid him over the course of the year. If she pays Dave over $600 in a year, she is now required to send him the 1099. The number of jobs doesn't matter or the amount of each job. It's the total dollars for the year. For rentals, the taxpayer just needs to issue 1099s for services not for materials used. And it looks like she will have to track and issue 1099MISCs to not only individuals but any type of business entity.

Both sides of the transaction will have new responsibilities under these rules. Ann will have to get an Employee Identification Number(EIN) for her rental business. And she will have to get the SSN or EIN from anyone who provided her a service. She can use a form W-9 for that. And Dave will have to give her that info. Then by February 28 each year she will have to issue a 1099MISC to any individual or business she paid over $600 that prior year for the amount she she actually paid by cash or check (payments by debit or credit cards don't count). Ann must also send a copy to the IRS and there may be state reporting requirements too. Dave will have to make sure that his bill break out the cost of the services and the cost of materials used on the job. And he will have to make sure he reports the income on his tax return. Even when he's paid with cash.

What if Ann decided that this is too much work and doesn't issue 1099s? First, I would have an issue deducting the expenses especially if I know Ann knew about the reporting requirements. So, more tax on her 1040. Then the IRS could get involved. Part of the Small Business Job Act of 2010 is a provision increasing the fees for not sending 1099s when they are required. The amount of the penalty will depend on how late the 1099s are.

This is not the only change in 1099MISC reporting to come out of Congress this year. In the health care bill, business reporting requirements were greatly expanded. The basic issue is the tax gap. The amount that is actually reported on tax returns compared to what the IRS believes should have been reported. The new 1099 requirements are designed to track who was paid, how much they were paid and make sure that the income is reported on their return.

Comments

[Cindy Galford]

Trish, none of my farmers have EINs, I just use their SS# on the 1099MISC I do for their contract labor and rents...is that wrong? Same thing for the sole proprietors I have been preparing 1099MISC for. I already have a handout and W9 that I am going to giveeach of them when I meet with them during filing season. This is going to get ugly unless it gets revoked this coming year...

[curtis johnson realty]

This is a good info that you have shared with us. There are a lot of issues rising from these rental scam and all. Many landlords have problems like high rental costs which will add up to the costs of investment therefore any products or goods made will have additional price. This is a sad thing yet we have to make some solutions to it.

[I Owe the IRS]

This is going to make it a lot more difficult for property owners. Most are already upside down on their properties and don't need anymore headaches. We'll see how it plays out.