Starting January 1, 2011, record keeping for rental property owners will become a little more complicated. Then starting January 1, 2012, all businesses, including rental property owners, will have an increased reporting burden. There are two new reporting requirements.
The first new reporting requirement is for rental property owners. If you are a rental property owner, you will join all other businesses with 1099 reporting requirements starting in January, 2011. Certain payments to individuals or partnerships for work done during the year may now have to be reported to the IRS by issuing a 1099.
As a rental property owner in 2011, you now must keep records of all payments to painters, plumbers, accountants, handymen and anyone else who does any work for you with regard to your rental properties. If those payments exceed $600 in 2011, then in early 2012 you have to file a 1099 with both the IRS and the service provider.
Before you can issue a 1099, you are required to have the name, address and taxpayer identification number or Social Security number for your service providers. You can obtain that information by asking your service provider to complete IRS form W-9 Request for Taxpayer Identification Number.
You can get a form W-9 from the IRS website at HYPERLINK “http://www.irs.gov” www.irs.gov. It is best if you discuss this reporting requirement with your service providers and have them fill out a W-9 form before they start the work. If service providers refuse to provide you with that information, then just refuse to pay them unless and until they complete the form.
These new reporting requirements are part of the recently enacted Small Business Jobs Act. A stated purpose of the Act is “Helping Americans Get Back to Work.” It seems that the only Americans getting back to work with these new rules are the bookkeepers and accountants who will be preparing all of these new 1099s.
There is a hardship exception to this reporting contained in the statute. However, there are no regulations to give us any guidance on what qualifies as a hardship. So at this point in time, I would recommend that you comply with the reporting requirements.
Another exception to the new reporting requirements is if you only receive a minimal amount of rental income. Again no regulations have been issued as to what is considered a minimal amount. Until this rule is clarified, you should report if you receive any amount of rental income.
There is also an exception to the new reporting requirements for members of the military or intelligence community if their rental income is solely from their principal residence on a temporary basis.
The second new reporting requirement will apply to ALL businesses, including rental property owners, beginning January 1, 2012. As a business or rental property owner, if you pay more than $600 during the calendar year to ANYONE, including corporations, for anything, you will have to issue a 1099.
The Patient Protection and Affordable Care Act, affectionately known as Obamacare, provided you with this little gift. These expanded reporting requirements were enacted to pay for the health care benefits of Obamacare. Under these new rules, practically all business transactions in 2012 and thereafter will require 1099 reporting.
For example, 1099s would be required for the following business transactions:
You fill up your business vehicle at the same gas station and pay more than $600 per year for gas.
You pay more than $600 in a year to your coffee or soft drink vendor.
You occasionally order sandwiches from the same local deli for employees or customers. Even though each payment may be only around $25, it totals more than $600 in a given year.
You buy a few office chairs from a local retailer for a total of more than $600.
You buy office supplies from an office supply store in a series of smaller purchases which total more than $600 in a given year.
You buy building materials from a single supplier totaling more than $600 in a year.
There may be some rental property owners or business owners who will ignore the new requirements. That would not be wise. If you fail to report as required, the penalties start at $30 and can go up to as high as $500,000 per year. Is it really worth the risk to not properly report these payments?
There are a number of individuals and organizations including the American Institute of Certified Public Accountants who have called on Congress to repeal these burdensome information reporting requirements that are being placed on rental property owners and other businesses.
The reasoning is that these businesses should not be given another added cost of regulatory requirements at a time when efforts are needed to focus on profitability and sustainability. The AICPA has stated that “Increased profitability is likely to yield more tax revenues than the expansion to the reporting requirement.”
With a Republican House and a Democratic Senate and Presidency, change any time soon seems unlikely. It would be best to start the record keeping now. Then when the time comes, you will be prepared.
By: Matthew M. Wallace, CPA, JD
Published edited November 28, 2010 in The Times Herald newspaper, Port Huron, Michigan as: Landlords get slapped with new IRS rules