New Tax Reporting Requirements for Landlords - Repealed
***Update*** The provisions identified below have since been repealed. On April 14, 2011 President Obama signed a bill to repeal this controversial expanded information reporting on Form 1099 for certain business payments and rental property expense payments. In summary, the 1099 reporting for payments to corporations (detailed below) is repealed, as well as the 2011 law for landlords to start issuing 1099s (detailed below). If you have any questions regarding this repeal, please contact your Terry Lockridge & Dunn accountant at (319) 364-2945.
Article originally published - March 3, 2011
While January 1, 2011 ushered in a new year for all, it also brought with it new reporting requirements for landlords. As part of a new law enacted with the Small Business Jobs Act of 2010 landlords receiving rental income from real property will be required to file information returns (Form 1099-MISC) with the IRS when they pay any contractor or other service provider $600 or more during the year for rental property expenses.
Information returns. An information return is generally required, under Tax Code Section 6041(a), to be made by a person (the payer) engaged in a trade or business that makes certain payments aggregating $600 or more in any tax year to another person (payee) in the course of the payer's trade or business. This filing requirement is commonly known as the "$600-or-more" rule.
New reporting requirement. Under the 2010 Small Business Act, a person receiving rental income from real estate is automatically considered to be engaged in a trade or business of renting property for information reporting purposes and is now subject to the “$600 or more” reporting requirement. The new reporting requirement,
effective for payments made after December 31, 2010, applies to landlords who make payments to service providers such as plumbers, contractors, maintenance companies, management companies, landscaping services, accountants, and other service providers (there is an exception; you do not have to issue a 1099 to attorneys). The first information returns from landlords required under this new provision, therefore, will be due January 2012 for 2011 payments.
The $600-or-more amount is an amount aggregated throughout the year, meaning that if you pay a particular service provider amounts that together total $600 or more for their services throughout the year, you are subject to the reporting requirement.
Example. You are the landlord of a 25-unit apartment complex downtown. You have a landscaping service come every two weeks to trim the bushes, cut tree branches, and mow the grass outside of the complex. They charge $200 per visit. Since your payments to them during the year will total well over $600, you will be required to provide the IRS a Form 1099 reporting the payments you make, as well as furnish the landscaping company with a copy.
Exceptions. The new reporting rule does not apply to individuals who receive rental income of only a minimal amount. The IRS has been given the authority to define “a minimal amount” as the term is used under the new law but has not yet done so. Small landlords and their advisors are lobbying for a high amount out of concern over the undue burdens placed on many landlords as the result of this new requirement.
The new reporting requirement also does not apply to any individual, including individuals who are active members of the uniformed services or an employee of the intelligence community, if substantially all rental income they derive is from renting their principal residence on a temporary basis. The new reporting requirement also does not apply if it would cause a hardship to the individual. The IRS will determine what a “hardship” is for purposes of this exception.
Corporations. The new reporting requirement does not apply to individuals who make payments totaling $600 or more to any service provider that is an incorporated entity, at least for payments made during 2011. However, as the law stands now, beginning on January 1, 2012, payments of $600 or more to corporations will be subject to more general information reporting requirements applicable to all business. The massive health care legislation passed in 2010 - the Patient Protection and Affordable Care Act (PPACA) - expanded the information return requirement for any trade or business – including that of a landlord “for information reporting purposes” – to include all payments made to corporations (other than tax-exempt corporations) after December 31, 2011, that aggregate $600 or more during the course of any one year. The general business community has been calling for the repeal of this expanded reporting provision, which does not take effect for another year, on January 1, 2012. Tim Terry, founder of Terry Lockridge & Dunn pressed Congressman Loebsack on this issues during a recent roundtable. Our office will keep you posted on any developments.
Nevertheless, beginning this year if you receive rental income from real property and make payments of $600 or more to any service provider who is not incorporated, and one of the above-mentioned exceptions does not apply, you will be required to report these payments to service providers on Form 1099-MISC. You will be required to furnish a copy of the Form 1099-MISC to the service provider, and also file it with the IRS.
Penalties. Failing to comply with the new reporting requirements may result in the imposition of penalties, which may include a penalty for failure to file the information return; a penalty for failure to furnish payee statements to the service provider; or a penalty for failure to comply with other various reporting requirements.
To more easily comply with the new requirements, if you have not already, you should implement recordkeeping systems and
maintain a database with the names, addresses, taxpayer identification numbers (TINs) or employer identification numbers (EINs), and other pertinent information, including total dollar amounts paid throughout the year to each of your service providers. This information will be needed to file complete and accurate Forms 1099-MISC with the IRS. Maintaining these records also will help you prove the legitimate deductibility of these expenses from the rental income on which you otherwise need to pay income tax.
If you have any questions about these new reporting requirements, please contact
Bill McDonald, Tax Director at (319) 364-2945 or
wmcdonald@tld-inc.com.