So this week we begin to get into some meaty tax changes. We’ve just wrapped our conversation about how to get caught up on your bookkeeping for 2010. By the end of this post you’re going to realize that the days of procrastinating to the end are clearly over as of December 31, 2010.
Beginning with tax year 2011 landlords will be required to file 1099 information returns for anyone that provides greater than $600 of services to their rental "business." I hear you, "what business, I only have one rental property?" In fact after doing some research today preparing for this post I found several posts from 2008 on a forum of tax professionals where they almost unanimously said the same thing.
So what changed?
Please welcome, 262 pages of The Small Business Jobs Act of 2010. This is the first time that landlords have officially been codified as "engaged in a trade or business." There is a long history of both Congress and the IRS dancing around what is actually considered to be "engaged in a trade or business" despite the phrasing being used liberally throughout the Code.
Well here they went right for it and if you "are a person receiving rental income from real estate" you’re in the club. So to what do you owe this great honor? Estimates are that the Treasury will raise nearly $2.5 billion over the next ten years a result of this additional reporting.
There are some exceptions; though if you are reading this blog they likely aren’t going to apply to you. The exceptions include:
* any individual, including members of the armed forces or an employee of the intelligence community, if substantially all rental income is derived from renting the principal residence on a temporary basis
* any individual who receives rental income of not more than the minimal amount, as determined under regulations prescribed by the Secretary
o as of the date of this post the "minimal amount" has not been determined; but, I would not rely on it as a reason to put off preparing to comply with the new rules
Advising small business clients on what needs to be done throughout the year to prepare for filing 1099’s has been a part of my professional life for over 10-years. So the advising part is easy… my experience has been that it’s the implementation on your part that will be painful. More so than many other businesses because it won’t be an everyday occurrence as you go through the year; however, it has to become second nature to you.
Here is what I tell my clients:
* At the beginning of every year start the process over again even if you’ve been using the contractor, landscaper, handyman, etc. for years.
* The first check that you pay them beginning in January give them a W-9 form before you actually give them the check.
o No form, no check end of story.
* Always write the check in the name that they filled in on the form whether it is their individual name or their business.
o NO MORE checks made to "Cash."
* Don’t second guess in January, February, or even November whether you will pay that particular service provider more than $600 by December 31. Everyone fills out a W-9 or they don’t get paid.
o Officially, if they won’t fill out the W-9 then you should withhold 28% and submit directly to the Treasury on their behalf. Don’t even bother…too many good contractors out there to make your life difficult so find a different one.
There are many more changes coming regarding who is required to begin issuing 1099’s. We’ll be covering some of those in future posts. Also, I’ll be introducing you in future posts to the 1099-K.