New Law: Landlords must issue 1099 forms?

Becoming a landlord can be a great option for those who want to manage a more “hands ons” investment.  You can develop relationships with longer term tenants whereby  you work as a team to maintain and enhance your real estate investment.

There are a few bookkeeping rules of thumb, however, that  you need to  consider when managing real estate.  One new  IRS rule, of providing 1099 forms to all contractors who provide more than $600.00 of services in one year, seems a bit cumbersome. Read on to find out how Landlords and property managements companies plan to approach this new law.

Be prepared for the 1099 requirement – from LandLord Solutions

Starting with the year 2011, individuals who own rental property will need to issue a 1099-MISC for payments relating to their rental properties. A 1099 form will be required if the property owner spends $600 or more per year with a specific vendor. Examples of possible 1099-MISC recipients: gardeners, landscapers, contractors, property management companies and repair services.

It started with the Patient Protection and Affordable Care Act, President Obama’s health care law, which required that small businesses file a Form 1099-MISC with the IRS for any goods they purchase from an outside vendor valued at over $600. It ended with the Small Business Jobs and Credit Act (HR 5297) which extended the mandate to private individuals who property from which they receive rental income. Section 2101 of the bill accomplishes this by considering anyone receiving rental income as “engaged in a trade or business”.

The provision is a revenue raising measure designed to offset other small business tax incentives and the Small Business Lending Fund Program created in HR 5297. It is expected to create about $2.5 billion in revenue, according to the Joint Committee on Taxation, the nonpartisan body that determines the budget affects of the bills that Congress produces.

This is going to be a big change for the “ma and pa” landlords. While landlords won’t have the issue 1099’s until 2012, they will need to start tracking their expenses in January 2011. Therefore if a person decides to rent out thier starter condo and pay a property manager, a plumber, a repairman, a locksmith, a condo association, etc. they will need to receive a taxpayer identification number from each of the vendors. At the end of the year, pick up 1099-MISC forms from the office supply store, fill them out, keep a copy for their records, send a copy to each vendor, then send the 1099s and a master form to the IRS.

Repeal Fails

There has been opposition to tmaking small businesses file 1099 statements since the original requirement was included in the health-care bill. Several amendments were introduced to try to kill the original mandate on small businesses – and its expansion to private individuals contained in the small business bill.

Unfortunately, Senate Majority Leader Harry Reid (D-Nev) allowed the Senate to vote on only two amendments that would change the 1099 requirements – one Republican amendment, sponsored by Sen. Mike Johanns (R-Neb) that would have stripped the 1099 requirement from the law and another supported by the White House that would have kept the mandates on business and private owners in place, but raised the threshold for compliance from $600 to $5,000. But both failed to gain approval, leaving the original mandate from the health-care bill in place – and the newly expanded 1099 burden contained in the small business bill.

What a landlord should do beginning in Janary

In anticipation of these forthcoming requirements, landlords and their accountants should review their bookkeeping systems so that they are collecting all the necessary information. In particular, ensure the accounting system is keeping track of payments issued to specific vendors, contractors and other businesses. At minimum the information to keep track of would included total payments made throughout the year, the name, address and taxpayer identification number of the vendor.

Best practices dictate to get the W-9 form signed as part of the initiating business with a new vendor. Require new vendors submit the filled out W-9 form with their invoice or require it before remitting payment.

Deadlines for 1099-MISC Forms for Landlords

Provide the recipient with his or her copy of the Form 1099-MISC by January 31, 2012 reporting income  for the previous calendar year.

Mail Form 1099-MISC to the IRS by February 28, 2012

Or Electronically file 1099s with the IRS by March 31, 2012

Penalties for Not Filing

The penalities for not filing a 1099 will be increased under the Small Business Jobs Act. The following penalties for not filing a required 1099 document will be in effect for the year 2011:

  • $30 penalty for filing a 1099 not more than 30 days late
  • $60 penatly for filing a 1099 more than 30 days late and before August 1
  • $100 penatly for filing a 1099 on or after August 1
  • $250 penalty for intentional failure to file

These penalties apply per 1099 that is required to be issued. The maximum penalty that cam be imposed per year have also increased.