rentals and the 199A deduction

[frankie123]

I wrote this elsewhere but didn't realize it was answering someone else. My question is I have client that has 33 rental properties is P/S with wife. This year they had profit of a little over 99,000. That is the only income other than Social Security. I ran up a what if 1040 and after everything my program is giving him around 11,000 deduction (199A). That really scares me because I have not seen any thing on rather rentals qualify, it seems its still up in the air. I know he did not send out 1099 forms as I saw something on that here but he pays all expenses by check and has those records. He also meets the 3 rules under the Safe Harbor.. Does anyone have any idea about the status of this problem, please let me know today

[Lion]

If he meets the Safe Harbor, why do you have a question?

Even if he doesn't qualify for the Safe Harbor, do you think the rentals in the partnership rise to the level of a trade or business? 33 rental properties would lean toward business. No earned income, just P/S income and SS would lean toward business for the P/S. I'm reading between the lines, but it sounds like his books & records lean toward business. What do you know about this client that leans toward No?

[Dude]

I think you should be concerned about the absence of 1099's. The fines are significant. Then again if he is only hiring INC's to do maintenance he is ok. Me thinks he is paying people (self employed read independent contractors) in cash for repairs and leaving it at that. Why do I think this? Because that is what most landlords traditionally have done, especially people who manage their own properties. This worked before QBID. After QBID the rules for pass through MAY change with regard to the 1099's. I have not seen conclusive guidance from the IRS on this issue yet.

[Burke]

OP stated rental owner pays by check and has all the records. When in doubt, issue 1099's and for the entire amount billed, even if it is broken down by materials and labor. When the rental owner buys the materials himself, then he can issue 1099 for labor only as he is deducting the expense for materials separately. The 1099 is for whatever the amount that is paid to the contractor who performs the job.

[Dude]

Did not mean to take a leap (forgot where I was) but in this case cash and checks are synonymous with the exception that checks will make it easier for him to reconstruct 1099. Unfortunately they also make it easier for the IRS to track the contractors income which makes me assume he is reporting it (as he should of course).

So IMO, the fact that he is paying everyone with a check makes it vital he go back to 1/1/2018 and put together 1099's if required. Again, this assumes he did not exclusively hire INC's.

[kathyc2]

A lot of issues here bigger than the 199A deduction. I assume that since 1099's were not filed for 2018 they were also not filed for previous years. For several years there has been a question on 1065 as to if 1099's were required to be filed. If it was marked no, did you or the client make the determination that they were not needed? If client made the decision did you document it and also document that you explained the rules for issuing 1099's?

If it was determined by you or client for prior years that rentals did not rise to level of trade or business and 1099's not required did something change that it did for 2018? Penalty for each 1099 after August 1 is $270 for form, double that if due to intentional disregard.

[New York Enrolled Agent]

That really scares me because I have not seen any thing on rather rentals qualify, it seems its still up in the air. … He also meets the 3 rules under the Safe Harbor.. Does anyone have any idea about the status of this problem, please let me know today

Whether a rental activity rises to a trade or business is a factual determination.

Have you read the final regulations on 199A? There is a very good discussion ( ballpark figure between pages 14-17) that discusses rental activities. The IRS will not give a "bright-line" test - instead they use the factual determination established by the Supreme Court in Higgins.

Take Lion's advice - use the safe harbor. If a taxpayer satisfies the rules, they are considered to be a trade or business solely for the purposes of 199A.

[kathyc2]

Take Lion's advice - use the safe harbor. If a taxpayer satisfies the rules, they are considered to be a trade or business solely for the purposes of 199A.

How would you deal with the missing 1099's?

[frankie123]

Thanks everyone for your time. I have talked to him about the need for 1099's never got anywhere with that one. The reason I am concerned is it is such a larger deduction that knocks his tax liability down to hardly nothing, less than $600.. I am going to go and read the final regs again. The one I have I printed out February 2019. Hopefully I can find something there to hang my hat on. Thanks again

[Lion]

Hang your hat on the Safe Harbor. As Kathy said, the Safe Harbor is for 199A purposes and does not make him a business for other purposes. However, if your client consents to late 1099s, the penalty will be a LOT less than his QBID.