1099's? Landlords--If qualify for the 199A deduction--1099s!

[ValRose]

In reading the thread, "QBI and Single Rental Property", it seems that if we decide a small landlord is entitled to the QBID/199A deduction, you must file proper 1099s! That thread seems important for all of us to read.

I've focused only on income taxes, but this year offered to do the 1099s for a Sch E client.
Can anyone help me with these 1099-MISC questions?

Faqs about this landlord:

1) For the last 2 years, she had only small repairs--no one was paid over $600.
2) Year before that, her prior accountant never talked to her about 1099's.
3) If the IRS potentially did complain about a 1099 she should have sent for 2015 (due January 2016), would that be the only year still open to statute of limitations for penalties?
(That is a Secondary question to those I have below).

This tax year (2018) she had LOTS of repairs (a few new windows, new kitchen cabinets and countertop upgrading). I'm in a debate over what to possibly de minimus expense (i.e. a $2000 window invoice). But that's a separate subject.

My 1099 questions are as follows:

A) She bought cabinets from "Cabinets to Go" and since a big national company, assumed they were incorporated. That may not be true (their website nor manta mention anything about incorporation).
Would seem a non-issue except that this (or a similar company) included free installation in the price.
Should company turn out not to be incorporated, would some sort of installation fee need to be inferred and a 1099 sent? (Hopefully, I'm being overly cautious here).
B) For other sole prop repairmen, regarding 1099-Misc Box 7 and whether to INCLUDE MATERIALS in the Box 7 amount, the IRS says to include:
* Payment for services, including payment for parts or materials used to perform the services (if supplying the parts or materials was incidental to providing the service)
Note: IRS uses an auto repair as an example, considering the parts costs to be "incidental" to the mechanic shop doing the repair--and hence to be included on the 1099.

So I'm supposing a Landlord who hires a plumber (or other indep contr) would include all the parts charges too on the 1099? (I don't see why it would be different than a repair at an auto shop).
But what if the contractor submits a completely separate invoice for the parts?

Would so appreciate any advice!

[Dude]

The section of the law requiring small landlords not engaged in real estate as business to file a 1099 was repealed in 2011H.R. 4 (112): Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011. This was interpreted to mean small landlords do not have to file the 1099 for various contractors. Wouldn't it be likely that the IRS would continue this in the yet to be released guidance of QBID and rentals?

[TaxGuyBill]

The section of the law requiring small landlords not engaged in real estate as business to file a 1099 was repealed

Correct, but by claiming §199A, you are stating it *IS* a Trade or Business (according to the current Proposed Regulations). As always, a Trade or Business is required to file 1099s (when appropriate).

So a history of not filing 1099s can easily be interpreted as you saying that the rental is NOT a Trade or Business (and therefore not eligible for §199A).



Val - A "Trade or Business" (including any rentals that you determine may meet that undefined term) should ALWAYS have a contractor fill out a W-9 before payment. When in doubt, send a 1099. If it is a 'gray area' to include parts or not, it really won't hurt anything to add it to the 1099.

[TAXNJ]

Form 1099 preparation can be challenging but start reviewing TTB page 23-7, in addition to the mentioned IRS web-site, which should address your form 1099 current questions and future questions.


As far as filing form 1099misc, in IRS audits, we have not experienced clients’ being denied being a “Rental Property” business for not filing form 1099-misc, but rather subject to expensive penalties for not properly filing form 1099-misc.
You can reference penalties for not filing properly (see IRS info Increase in Information Return Penalties) link = https://www.irs.gov/government-entit...rn-penalties-2

[ValRose]

On the Drake forum, an accountant mentioned this as added input:
I would like to point out something however, that may be a solution to this problem. Remember that since the introduction of the 1099-K Form, businesses are only supposed to issue 1099 forms to other businesses who they paid in cash or checks - NOT by credit card, debit card, PayPal, Venmo or other payment service. This is avoid duplicate reporting, meaning picking up the same payment a 1099-MISC and a 1099-K. I have a small business client who used to issue 5 to 10 1099 forms per year. Now, we issue one or last year none! He started paying everyone through PayPal or with a Credit Card (that will accept those forms of payment). Due to that change, we do not have to issue as many forms - even to my firm (I am a sole proprietor). He started sending our firm payments through PayPal on our website. I would advise landlords to use one of these methods if the vendor will take it. Problem solved!
I'm new to 1099's--Tax Guy Bill and others--Is this also your understanding?

[TaxGuyBill]

Yes, that is correct.

That is an excellent idea, IF the contractors will accept that type of payments.

[TAXNJ]

For reference: See page 2 of the IRS instructions for Form 1099-MISC: "Payments made with a credit card or payment card and certain other types of payments, including third party network transactions, must be reported on Form 1099-K by the payment settlement entity under section 6050W and are not subject to reporting on Form 1099-MISC. See the separate instructions for Form 1099-K."

One might consider that even if Form 1099 misc was also sent, there are penalties for failing to send out 1099-MISC forms. But there’s no penalty for sending 1099 forms if they turn out not to be required.

[Dude]

This is turning out to look like a penalty trap, especially for the landlord with 1-2 properties who has a handyman that "would rather be paid in cash" (common situation because mind you, it is very hard to find a good handyman). This person is lulled into taking the 199a deduction and then is set up for potentially steep penalties for not issuing 1099k. This reminds me of another penalty trap: where a low income household member qualifies for medicaid based on their near indignant status, but then is claimed as a dependent by the person they are living with which sets them up to be fined by medicaid for repayment.

[TAXNJ]

As many tax professionals inform their clients, there are many "good" handymen/women that meet the requirements of being issued form 1099-misc. It is the law and not a penalty trap. The penalty trap is not issuing a form 1099-misc if required whether paid by cash, check, credit card, etc.

[Dude]

Yeah, but up to now it has not been required so you really don't know what the reaction of Joe Handyman will be when you start sending him a 1099. I think the client understands the intrinsic value of having someone you trust work on your property. I just want them to be prepared to lose Joe Handyman (who up to now did not consider himself what he was, an independent contractor).

[Burke]

....the landlord with 1-2 properties who has a handyman that "would rather be paid in cash" (common situation because mind you, it is very hard to find a good handyman). This person is lulled into taking the 199a deduction and then is set up for potentially steep penalties for not issuing 1099k.

So, in the case above, it is assumed that the TP landlord is deducting these payments "paid in cash", therefore benefiting from the tax benefits, with no corroborating record since no 1099 is being issued?

[Dude]

More likely they are deducting the materials but not the labor but even if they were deducting the labor up to now they were not compelled to issue a 1099 (based on the 2011 decision). Now we have a fundamental change in the requirements: claiming QBID makes your rental a business and thus subjects you to rules you did not have to previously follow. Offering a huge carrot (the 20% QBID) while hiding an even bigger stick (the 1099 penalty) is a trap IMO.

[TAXNJ]

Yeah, but up to now it has not been required so you really don't know what the reaction of Joe Handyman will be when you start sending him a 1099. I think the client understands the intrinsic value of having someone you trust work on your property. I just want them to be prepared to lose Joe Handyman (who up to now did not consider himself what he was, an independent contractor).

Well, the form 1099-misc requirements have been around for years (see IRS forms).

Years ago, there was a case of a general contractor who did not issue 1099-misc to their subcontractors. During an IRS audit of the general contractor it was found non-issued 1099-misc to their subcontractors.

As a result, the general contractor had to pay substantial penalties & fines and provide the names, TIN# and addresses of all the subcontractors.

Also, the general contractor and subcontractors had the intrinsic value of having someone you trust work on your property until the audit happened.

[Dude]

Well, the form 1099-misc requirements have been around for years (see IRS forms).

Years ago, there was a case of a general contractor who did not issue 1099-misc to their subcontractors. During an IRS audit of the general contractor it was found non-issued 1099-misc to their subcontractors.

As a result, the general contractor had to pay substantial penalties & fines and provide the names, TIN# and addresses of all the subcontractors.

Also, the general contractor and subcontractors had the intrinsic value of having someone you trust work on your property until the audit happened.

You're missing my point: The 1099 law did not apply to landlords until the dawn of QBID. This is like offering a farming credit and promoting it by saying backyard gardeners are eligible, but not mentioning that by taking the credit they are declaring themselves a Farm and thus are subjecting themselves to water, soil and pesticide regulations. If the backyard gardener complains, you can't just say "well the farming regulations have been around for a long time". You have to warn them BEFORE they declare their backyard garden a Farm.

Same here. Assuming small landlords understand the tar pit aka 1099 they are stepping into is not realistic.

[TaxGuyBill]

You're missing my point: The 1099 law did not apply to landlords until the dawn of QBID.

I disagree. It is ALWAYS been a requirement if the rental rises to the level of a Trade or Business. But in prior years, most people claimed their rentals were NOT a Trade or Business (it was just investment property), so did not issue 1099s.

Now many people WANT to claim it is Trade or Business to potentially get QBI.

So if a taxpayer has had a rental for many years and NOT been issuing 1099s (when applicable), they have been stating it is NOT a Trade or Business. Now if they suddenly claim it is a Trade or Business (by claiming QBI and issuing 1099s), we need to ask ourselves "What changed?"

I think that is prime IRS audit territory. I would think an IRS auditor would have two choices: (1) disallow the QBI because the taxpayer has been stating it is not a Business for many years, or (b) allow it to be called a Business and claim QBI, but assess penalties for non-filed 1099s for the past many years.