2011 January 7 by Andrew Savard
…..each charges the landlord $600.00 for his services. This sounds like the beginning of a joke, but it is not. What do these three vendors have in common? Each of them needs to be sent an IRS 1099 form by the landlord.
Prior to the passage of Small Business Jobs and Credit Act of 2010 (H.R. 5297), most small landlords were not considered to be “conducting a trade or business” and therefore were exempt from certain tax reporting requirements by the IRS. The IRS previously only required businesses such as full-time property managers to track and report payments to vendors. However, the new bill expands the definition of “conducting a trade or business” to include all property owners. Section 2101 establishes that, “a person receiving rental income from real estate shall be considered to be engaged in a trade or business of renting property”.
The new law requires that any person receiving rental income from real property must file a 1099 for all payments made to service providers in excess of $600.00. For larger landlords and rental property owners, this requirement to track payments to vendors is not new. H.R. 5297 now requires even owners of a single unit of rental property (such as a partially owner occupied multi-family property or as part of a self-directed IRA or other personal investment) to track and report payments to any vendor providing at least $600.00 worth of services or face stiff penalties. It is important to note that this is cumulative so if you hire someone to clean the property at a rate of $60.00 per month, the aggregate of the payments would exceed the $600.00 threshold.
H.R. 5297 does provide a couple of exceptions but they are naturally quite vague at this point. The exceptions are as follows:
1. If gathering the information and issuing a 1099 would be an undue burden or hardship.
2. If the rental is a temporary rental of your own residence.
3. If the income from the rental does not meet a minimum amount
The IRS hopefully will provide some guidance on what constitutes a hardship and the minimum income threshold. It is important that you stay up to date with these changes.
So for small landlords, you now have a legal obligation to obtain and keep certain information about your vendors. This information includes, but is not necessarily limited to, the name, address, and taxpayer ID of the vendor as wells as amount you pay them. Examples of vendors include electricians, plumbers, handymen, accountants, cleaners and pretty much any person or company that provides services to rental property owners.
As always, if you are running any sort of small business it is essential that you maintain detailed financial records. You should review your bookkeeping practices to ensure that you can accurately track payments made to vendors. It is also a good idea to have any vendor that you anticipate paying more than $600.00 this year provide you with a completed W-9 prior to beginning work on your property. Remember you will have until January 31, 2012 to issue a 1099 for those vendors so it is very important to be prepared ahead of time..