YOU must have noticed questions on Schedule E, Part I for rentals:
• Were you required to file Form 1099-MISC?
• If so, did you or will you file?
Very simple yet it is one of the most commonly argued questions among tax professionals who prepare returns for individual owners of rental property.
Here’s the basic rule: Reporting of Form 1099-MISC is required when payments are made in the course of your trade or business. If you operate for gain or profit you are engaged in trade or business. Personal payments are not reportable.
What are Reportable payments? The following are reportable payments if all of the following conditions apply:
• Payment was made to a nonemployee or independent contractor including parts and materials.
• Payment was made for services rendered to or on behalf of your trade or business.
• Payment was made to an individual, partnership, estate, or in some cases, a corporation.
• Payments to corporations generally do not need to be reported.
• Payments to attorneys are reportable even if less than $600.
• Payments to the payee $600 or more in total during the year including payment for materials or parts used by the payee in rendering the services if supplying the materials or parts was incidental to providing the service.
• The payment was not made electronically (otherwise, the government already has record of transaction).
• Payments made through a credit card, debit card, PayPal, or gift card.
• Bank or third-party payers must report the payment to the IRS and recipient on Form 1099-K.
• You do not have to report the transaction on Form 1099-MISC (to avoid duplicate reporting).
Are Landlords Considered Trade or Business? Yes. No. Maybe.
• No – for the reason that landlords are engaged in passive investment activity.
• Yes – if your activity level rises to that of a “real estate professional.”
• Yes – if several properties are offered for rental and property owner’s management activities are continuous and regular.
• Yes – if you provide significant services to renters (bed and breakfast, hotels, and motels).
• No – for Section 179 expensing (instead of depreciating) because it is presumed not to be a trade or business.
• Yes – for Net Operating Losses (NOL).
• Baffled? Me, too. But I suggest that you file.
When Should 1099-MISC be filed?
• By the 31st of January to recipients.
• By the 28th of February to the IRS if paper filed (2/28 even in a leap year when February ends on the 29th)
• By the 31st of March to IRS if electronically filed.
Are there Penalties for Late filing? You bet. There’s a time-sensitive three-tier penalty structure as follows:
• $50 if late for 30 days or less.
• $100 if late for more than 30 days, but by August 1.
• $260 if filed after August 1.
Can you Give us Examples of 1099-MISC Recipients? Of course.
• Let’s start with accountants, architects, attorneys, engineers, and contractors.
• Gardeners, carpenters, plumbers, electricians, landscapers.
• Exchange of painting services for rent.
In summary: It is a best practice for rental owners operating a rental trade or business to issue 1099s to unincorporated plumbers, gardeners, painters, or roofers who get paid $600 or more for the year. If in doubt, file.
In accordance with IRS Circular 230, this communication is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose.
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Sy Al-os Accountancy Corporation provides accounting and tax services to individuals, corporations, LLCs and business entities. The Firm has a niche in defending taxpayers audited by the IRS and other governmental agencies.