Expansion of Form 1099 Reporting Requirements for Rental Property Owners
Recently passed legislation calls for major changes to 1099 reporting requirements affecting tax year 2011. As a result, these changes are predicted to affect millions of people receiving rental income, including individual taxpayers who file IRS Schedule E (“New 1099 Rules”). The following provides a breakdown of these changes.
Form 1099 Reporting Requirements: The Small Business Jobs Act (“SBJA”) was signed into law in 2010. It expands the 1099 reporting requirements to payments for rental property expenses paid by many taxpayers receiving rental income. Under SBJA, taxpayers who receive rental income from real estate are considered to be performing in a trade or business. These taxpayers are now snared by Section 6041 which requires “persons engaged in a trade or business” to comply with information reporting requirements. This provision applies to payments made after December 31, 2010 (“New Rules Require”).
Beginning this year, taxpayers generally must report payments of $600 or more to a service provider (such as a plumber, painter, landscaper, etc.) in the course of earning rental income. However, limited exceptions do apply.
Exceptions under SBJA: Under Section 2101 of the SBJA, the exceptions to the above mentioned reporting requirements include:
1. Any individual if substantially all rental income is derived from renting all or any portion of their principal residence (within the meaning of Section 121) on a temporary basis. This exception includes individuals who are active members of the uniformed services or employees of the intelligence community.
2. Any individual who receives rental income of not more than a minimal amount, as determined under regulations to be prescribed by the IRS, and
3. Any other individual for whom the requirements of this section would cause hardship, as determined by the IRS (Thompson).
Request for Immediate Guidance: In January, the AICPA recently wrote a letter to the U.S. Department of the Treasury stressing the urgency of issuing guidance on the reporting requirements that apply to rental property expenses incurred after 2010. The IRS and Treasury Department have yet to issue any guidance on the expanded reporting changes or on the above mentioned exceptions in terms of defining “temporary basis”, “hardship” and the threshold for “not more than a minimal amount” (Thompson).
Moving Forward and Obtaining Proper Documentation: The expanded reporting requirements will cause an administrative burden for taxpayers owning rental property and will increase costs associated with accumulating the relevant information needed to prepare a correct Form 1099-MISC, due in early 2012 for the 2011 tax year (“New Rules Require”). Taxpayers owning rental property and issuing payments to service providers of $600 or more annually should be ready to comply with these changes regardless of the lack of guidance from the IRS and Treasury Department. It would be prudent for property owners to obtain Form W-9 from their service providers. Form W-9 is a request for a payee’s taxpayer identification number and residency certification. Rental property owners need to obtain the correct taxpayer identification number (TIN) from their service providers in order to properly issue Form 1099, otherwise fees and penalties could be assessed (“2011 Instructions”).
Conclusion: Controversy surrounds these new changes to the 1099 reporting requirements enacted by the Small Business Jobs Act. Moreover, some people anticipate a full repeal (though at this time, no definitive solution has been reached) (“House Committee”).
We suggest that all taxpayers who own rental property should obtain Forms W-9 from service providers and keep records of all payments made to them until the IRS and Treasury Department issue further guidance on the reporting requirements and possible exceptions. If you have any questions or would like copies of Form W-9 to issue to your service providers, please contact us and we would be glad to assist you.
“2011 Instructions for Form 1099-MISC.”
Internal Revenue Service. 14 Jan. 2011. Web. 31 Jan. 2011.
“House Committee Sends 1099 Repeal to the Floor; Senate Passes Its Own Version of Repeal.”
Journal Of Accountancy. 17 Feb. 2011. Web. 25 Feb. 2011.
“New 1099 Rules: President’s Speech Offers Hope for some Relief; Exceptions for Rental Income Reporting Remain Vague.”
Journal Of Accountancy. 27 Jan. 2011. Web. 31 Jan. 2011.
“New Rules Require Rental Property Owners to Issue 1099s.”
Journal Of Accountancy. 11 Nov.. 2011. Web. 31 Jan. 2011.
Thompson, Patricia A. “AICPA Letter to U.S. Department of Treasury.”
AICPA. 26 Jan. 2011. Web. 31 Jan 2011.