rental
Avoid 1099 requirement
Thursday, February 10th, 2011 | consulting, tax | No Comments
The new credit card reporting rule has created a potential money-saving opportunity for businesses subject to 1099 reporting. Everyone engaged in a trade or business (including landlords beginning in 2011) must report payments of $600 or more to non-corporate service providers on Form 1099 to the payees and the IRS. Beginning January 1, 2011, banks and online payment networks are required to report credit card sales to participating merchants and the IRS on Form 1099-K.
The combination of these two rules created the specter of duplicate 1099s and a processing nightmare for payees receiving payments by credit card. The IRS has issued a regulation that exempts payments reported on Form 1099-K from duplicate reporting (e.g., on Form 1099-MISC). So if businesses and landlords pay their service providers by debit or credit card, they may be able to avoid the expense of issuing and filing Forms 1099.
If you are a service provider who normally receives Forms 1099 from your customers, you may see this new regulation as an opportunity to enhance your relationships and your cash flow by setting yourself up to accept debit and credit card payments. Payment networks charge a fee for processing transactions, but the process is easier than ever. Processing options even extend to smartphones, so you can process payments immediately at the work site. That sure beats the thirty- to sixty-day cycle of traditional invoicing and billing.
Landlord? Get ready for 1099
Monday, February 7th, 2011 | tax | 1 Comment
If you have property that you rent to others, the IRS says you are engaged in a trade or business beginning January 1, 2011. This means you become subject to Form 1099 rules. If you pay an individual or company (not a corporation) more than $600 in the calendar year, you must report these payments to the payee and the IRS (usually on Form 1099-MISC, the same form you may be receiving for your rental income). These individuals include, for example, your repairman, plumber, landscaper, accountant, and attorney.
Considering this, it’s a good idea to collect the information you will need as each service provider does the work for you. The IRS created Form W-9 for this purpose, but you’re not required to use it. Just make sure you get at least their name, address, and Social Security number or Employer Identification number. This will save you the hassle of tracking them down next year before the January 31 deadline.
There are exceptions to the new rule:
- An active member of the uniformed services or an employee of the intelligence community who rents your principal residence on a temporary basis;
- An individual who receives rental income below a minimal amount (the IRS has not yet established this amount);
- Any other individual for whom the requirement would cause hardship (the IRS has not yet established what would constitute hardship).
We will keep you posted as regulations are developed to more fully define this new rule, which was part of the 2010 Small Business Jobs Act. You may have heard news about repealing the 1099 reporting provision contained in the health care reform act. We have word that although Congress is considering repealing those requirements, the law’s application to landlords is likely to stand.
There may be a legitimate way to avoid the 1099 reporting rule (besides not collecting rent). We’ll tell you more about that in a future post.
Take action now to reduce taxes
Tuesday, November 23rd, 2010 | consulting, tax | No Comments
Year-end is the best time to take actions that have an impact on next spring’s tax bill. There’s not much you can do after the year is over. Take time to do financial projections through year-end and calculate your tax bill. Working with your accountant, you can identify actions to take that may reduce your tax or improve your financial position.
Although we are still waiting for Congress to act on several important tax issues, laws were passed earlier this year that change the calculations for many business owners. You still have time to arrange things to take advantage of these new provisions.
The Affordable Care Act introduced a tax credit that takes effect this year for smaller employers who pay at least part of their workers’ health insurance premiums. After determining whether your company is eligible and the amount of the credit, you can calculate how much net income (and taxes) will be offset by the credit.
The HIRE Act offers a payroll tax reduction for hiring new workers, starting with the second quarter of 2010. If you have not been taking advantage of this reduction, amend the prior returns and reduce the amount of your deposits in this final quarter for a holiday cash windfall. Beware, though, that the reduction may also reduce your payroll tax expense deduction and increase your income tax bill. If you keep those new hires on the payroll for a year, you get an income tax credit in 2011.
The Small Business Jobs Act, enacted in September, contains about a dozen and a half provisions that may affect your business’s tax situation this year and next. They include:
- Several adjustments to depreciation deduction limits for first-year write-offs and bonus depreciation for various types of property and vehicles.
- An increase in the up-front deduction for business start-up expenses if the business starts operation in 2010 only.
- An option to carry back business credits five years and recover taxes previously paid.
- Relaxation of the record-keeping rules for deducting cell phones. (Did you know you had to log every business call?)
- A reduction in self-employment tax for self-employed persons who buy health insurance for themselves and their families.
These provisions may affect you starting in 2011:
- Many rental income recipients must begin issuing Forms 1099 to service providers (e.g., plumbers, painters, etc.) to whom they pay $600 or more. (Some exceptions apply.)
- Penalties for failure to file information returns such as Forms 1099 have been increased substantially.
If you work through the projections and consult with your tax professional before year-end, you can make decisions that may save your company taxes and improve your financial position.
Renting to relatives
Monday, June 28th, 2010 | consulting, tax | No Comments
Renting property to your relatives can be a good thing. You know them, and you probably have a good idea of how they will take care of the property. You may consider renting to your retired parents or to your children attending college. You must play by IRS rules to retain the tax advantages of renting out property. If you don’t, the deductions will be disallowed while the income is taxed - a double tax hit. You may also suffer unfavorable tax consequences when you sell the property.
Special rules apply to rental of a residence (rental house or apartment) and to vacation home rental.
You must charge a fair rent to your relative on a residence to avoid having that property reclassified as a second home (and losing rental deductions).
- Prove fair rent by collecting third-party documentation about rents for similar properties in the area from the want ads and craigslist. Letters from property managers and independent appraisals are good evidence to support fair rent.
- Do not make gifts to help your tenant pay the rent. The gift will be deemed to reduce the rent, putting it below fair value and jeopardizing the rental claim.
- One alternative for your relative who needs rent money is gifting business assets and having your company lease them back so that your tenant receives rental income. Another option is to hire your relative, although that generates payroll taxes.
- You may consider a good-tenant discount of no more than 10%. One justification for this discount is that there is no need for a rental management company, passing the savings to the tenant.
- If you wish to set up a rent-to-own situation, you must follow the rules for a shared-equity financing agreement for the rental to stand.
- Your relative must use the rental property as a principal residence.
If you have a vacation home that you rent for part of the year and also use personally, the tax code provides a break on rental income. Your personal use of the vacation home must not exceed the greater of 14 days or 10% of rental days per year. If your relatives use the vacation home, their use counts toward these limits even if you charge fair rent. If your combined use exceeds these limits, the property becomes a second home, which makes the rent income taxable while eliminating the usual rent expense deductions.
If you are considering renting to relatives, a call to us will help ensure that everything is done in a way that secures the greatest tax advantages and best financial outcome for your family.