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Are you a rental property owner wishing you had more
opportunity to submit yet more tax forms to the
government? Well then, you are in luck!
The recently-enacted federal Small Business Jobs Act
contains a provision affecting most rental property
owners. Under the Act, property owners who receive
rental income must issue 1099 forms to all service
providers and contract laborers (landscapers, trash
service providers, maintenance contractors, etc.)
for payments made in 2011 which total $600 or more
per service provider. Property owners must also
submit a copy of all issued 1099s along with a
summary form (Form 1096) to the IRS.
Summary
Taxpayers engaged in a trade or business must
already issue these forms to service providers. The
new Act “ropes in” owners of income-producing real
estate to these same requirements. In short, the IRS
has determined that you are in the trade or business
of renting property. Under this new law, owners who
receive rental income from their property, and who
make payments of $600 or more to a service provider
in any one year in the course of operating that
property, are required to produce and send IRS Form
1099-MISC (Miscellaneous Income) to the service
provider and to provide a copy to the IRS.
The new law applies to all payments made starting
January 1, 2011. For example, cumulative payments
during the year which total $600 or more to
painters, landscapers, accountants, lawyers, repair
contractors, that are made in the course of
operating your self-storage business must be
“1099’d.”
While rental property owners will not actually issue
these 1099s to service providers (or submit copies
to the IRS) until early 2012 (for payments made
during tax year 2011), owners should begin keeping
appropriate records of these payments starting
January 1, 2011. This entails obtaining the name of
the service provider’s name (or business name) as
well as mailing address and taxpayer ID number (or
Social Security number, if an individual), using IRS
form W-9. In other words, you should make it part of
your accounting procedures to obtain a form W-9 from
every new vendor/service provider before issuing a
payment, especially if you believe your payments to
that vendor may total $600 a more during the year.
In the past, business owners did not have to issue
1099s to corporations. With that exemption removed,
rental property owners must issue a 1099 to all
service providers, regardless of their incorporation
status, unless the service provider is a
not-for-profit entity (like TSSA), exempt under IRS
rule 501(a).
Exceptions
The new law does provide for “hardship”
exceptions—in other words, individuals who can show
that the requirement will create a hardship for them
may be exempted from these 1099 requirements. The
IRS has been directed to issue guidance on this, but
has yet to do so at the time of publication of this
article. At this time, there is no guidance as to
what would qualify as a hardship, or how you would
need to “prove up” a hardship.
The law also contains an exception for owners for
whom rental income is a “minimal amount,” or from a
primary residence. Again, the IRS has been directed
to issue guidelines for what “minimal amount” means
exactly, but has not done so yet.
Penalties
The deadline for issuing 1099 forms is January 31.
The penalties for non-compliance have also been
increased. The following penalties for failure to
file a required Form 1099 will be in effect for tax
year 2011. These penalties apply per each 1099 that
is required to be issued:
The penalty for filing a Form 1099 up to 30 days
late increases from $15 to $30, with a maximum of
$250,000; the penalty for filing a Form 1099 more
than 30 days late but before August 1 increases from
$30 to $60, with a maximum of $500,000; the penalty
for filing a Form 1099 on or after August 1
increases from $50 to $100, with a maximum of
$1,500,000; and last but not least, the penalty for
intentional failure to file increases from $100 to
$250.
Bottom line
Effective January 1, 2011, track your payments to
all service providers, whether by cash, check, or
credit card. At the end of the year, any one
contractor, entity or individual, who received $600
or more needs to be sent a 1099 to file with their
taxes, and you must submit a copy of all such 1099s
to the IRS. This includes virtually all service
providers, such as plumbers, electricians, painters,
cleaning services, gardeners, landscapers,
accountants, and handymen. In essence, it boils down
to this: “If thou doth not W-2 ‘em, thou shalt 1099’em.”
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