Do you send 1099's to your contractors?

Schedule E's now ask if you have done so for all contractors (who are not corporations) to whom you paid more than $600 for the year, and all payments to Attorneys regardless of amounts.

W,

We send them to EVERY contractor and supplier we paid $600 or more. It's easy with a simple report from Quicken. Cheap insurance against a "discussion" with the IRS.

If that's wrong we err on the side of protecting my biz.

PS If that company does not need the 1099 THEY can toss it or whatever they want.

I love the annual debate. I don't, yet...

From the IRS website:

If, as part of your trade or business, you made any of the following types of payments, use the link to be directed to information on filing the appropriate information return.

Payments, in the course of your trade or business.

Does this mean main trade or business? Because I have a full time w-2 job.

Eddy Mac is correct. The IRS treats rentals as "Investment income" and not trade or business. That is why you do not have to pay SS on profits from rentals.

This is indeed the annual debate. I used to be on the side that we did have to send them. And argued quite a bit with Marv about it. However, in 2014, I changed my mine. I don't believe that most of us need to send them because most of us are not (by the IRS's definitions) "in the business of renting real property."

I don't want to get into it all over again, so here is a link to my thoughts from 2014:

bbs2.mrlandlord.com/display.php?id=14181313

All that being said, Marv believes that many of us should file an 8300. But I disagree with that -- for mainly the same reason that we don't have to file the 1099.

In any case, one thing is clear: there is CLEARLY disagreement on this issue -- even among the experts. You can easily find CPAs (and various experts on various websites) saying that we DO and DO NOT have to file them.

That is why so many people go with the "better safe than sorry" system. There is no penalty for filing them if you do not have to -- except the possibility of ticking off your contractor that is already lying to the IRS about his income...

- John...

I find it hard when I send a 1099 to a contractor.........

Part of what they get paid is for materials. Part is for labor....I have had the contractor use the: you pay for the materials and I can do it for $599 in labor sales pitch.

If the contractor pays for the materials he writes those off on his own taxes. If we pay, we write them off on ours.

We claim RE Pro, which means we ARE in the business of renting property. That's our primary income. So we 1099 for sure.

But Form 8300? No we don't, as we don't receive cash from individuals. Certainly not $10,000 or more. Our BANK does, and they take care of that reporting.

"Exceptions. Cash is not required to be

reported if it is received:

• By a financial institution required to file

FinCEN Report 112, BSA Currency

Transaction Report (BCTR); "

Also:

"Who must file. Each person engaged in a trade or business who, in the course of that trade or business, receives more than $10,000 in cash in one transaction or in two or more related transactions, must file Form 8300. Any transactions conducted between a payer (or its agent) and the recipient in a 24-hour period are related transactions."

I agree with you -- it refers primarily to cash and cash-like payments. Note that 8300 very specifically DOES include MONEY ORDERS in that though. So, if WMH was paid over $10,000 in money orders, then they likely would have to file the 8300.

If it is direct deposited to your bank, then no.

Also, as for your monthly rents not being related transactions... I'm not sure the IRS would agree with you. On their web site, the EXAMPLE situation that they give is a taxi driver that payments monthly lease payments to their employer for the taxi itself. In that example, the IRS very clearly states that they DO consider those monthly lease payments to be related transactions and the receiver of those lease payments WOULD have to file the 8300.

So, I'd be careful before assuming that the IRS would consider monthly rent payments to be "unrelated" -- especially on a 1-year lease and not MTM.

- John...

That's interesting, John.

But I don't accept rent into my hands in any form - even if my residents DID pay by money order, it is accepted by the BANK who tracks all that. But since they have to go to the bank to deposit, I doubt they bother to go buy a money order. They would just take the cash to the bank.

So I skimmed the IRS web site on Form 8300, and to me it seems that an old-school landlord who drives around picking up cash each month WOULD need to file Form 8300 as soon as the cash totaled $10k for any one of his residents.

WMH: The example was clear that the ongoing taxi lease was well under the $10k per year. The whole point of the example was to show that the IRS did consider the lease payments on the vehicle to be a "related transaction."

As for the form, they would indeed need to do it -- if they were a pro. In my opinion, it is the same situation as the 1099s and the 8300 is only required by those who are "in the business of renting real property." Which, according to many experts, most LLs are NOT. (You have declared otherwise, so that is different for you.)

- John...

I love the debates! All you stubborn landlords have been saying the same thing since 2014.

Marv, how would you back up your statement that,"I have never seen the IRS fine or even question if a landlord sent out 1099s?"

I'm just wondering where you get your information from, because I want to start getting mine from there, so I agree with you and all...

So lets say I'm not required to issue an 1099 because this is not my trade or business, am I not able to write it off like WMH said? This I have no clue on.

If you are not an RE Pro - meaning you also have a W-2 job - your deductions for your real estate are limited to ($25k?) per year. And as you make more W-2 money, the deduction is scaled down until, if you make more than $150k, you can't deduct anything...it is all deferred until you sell the house.

In 30 years of doing taxes, I have never heard of a landlord getting fined for not sending out 1099s.

It's not the fining I was worried about. I didn't even know that was an issue. I thought it was to help prove payments if you happened to be audited.

1099s are required if rentals are your trade or business. Having a W-2 job does not disqualify you from having a rental business.

Your rentals are a business if you do it for a profit and work at it regularly, systematically, and continuously. -Alvary v. United States, 302 F.2d 790

Whether your rentals are a trade or business also effects section 179 deductions (accelerated depreciation) and home office deductions.

If your rental investments do not qualify as a trade or business, you do not need to send 1099s, though the IRS may still want you to.

Wmh--You are confused. When you are not an "active" real estate investor, you can still take all of your regular expenses related to real estate investing as deductions. What you are referring to is the rule that if you have a net loss on your real estate activity you are limited as to how much of that loss (passive loss) can be deducted against your other (active) income.

If you are a true passive investor, the answer is none of it--you can, however, carry the loss forward.

Kyle- I looked up the case you sited and find no relevance. Alvary V United states was a 1955 case concerning the basis of a building sold in Hungary.

Marv-

For me, I just do what they tell me to do. Several years ago, it was a matter of debate among CPAs whether 1099's needed to be filed. Over the last couple of years, two different CPAs have advised their clients (me included) to file them. So we do.

I don't think there is anything in writing regarding SS vs 1099. I have just based it on

Being in trade or business = pay SS

Having investment income = no SS

Much like when you take early SS

Earnings on which you pay SS = income that is counted when paying back SS.

I would venture to say that no one who visits this forum pays SS on profits from rentals. Thus no one would have to file 1099s. The IRS likes it when you file 1099s but I don't think its mandatory. they even encourage it by putting the 1099 question on top of the form.

Now I'm totally confused.....Thanks everyone....lol

yes, if for no other reason that to impress on the vendors that their voting choices have ramifications. many are perfectly willing to be tax feeders while the tax payers cover their nut. by issuing the 1099's they get a big fat lesson in the true cost of being in business and start thinking about the choices they make at the ballot box. this is ESPECIALLY true in california which has become the WORST business climate in the nation as the democrats took the helm over the last three decades. if i can help redirect that steaming pile of a state with a few 1099's then let me at it!

so I have a question for the future:

I appreciate this yearly discussion. But these are so easy and cheap, why do people want to poke the bear?

I pay $5 per 1099 for my tax preparer to send them out. We send out about 50 due to multiple LLCs.

I do not trust the IRS. They like to shift rules. They play word games. If they shift or decide to call me a pro (I hear that happening a lot) I'm covered. When they decide to go back 3 years I'm covered.

So I paid $250 that some people say I should not. Cheap insurance. Takes me about 1 minute to sign the docs and it's done.

I DO know this - occasionally (one or two per year) we did not get a SS# and that contractor is long gone, or the contractor gives us a fake or typo'd SS#. The IRS DOES catch those and sends us a nasty letter demanding the SS#.

The following is one of several similar emails I have received from different CPAs in the last few days:

Dear Mr Landlord, 1099s are required for any unincorporated service providers. Contractors, lawyers, repairmen, cleaning people, landscapers etc. The IRS makes no distinction between active and passive business income for 1099 purposes and the fines for intentional disregard are terrible.

James L Banwart Jr CPA

620-223-4300 x31

We send 1099s to all un-incorporated vendors who we paid more $600 in a single calendar year. Our CPA advised that as rental owners we only need to provide 1099s for ATTORNEYS who did work for us. BUT that for non-RENTAL property like flips, like developments, like scattered lots, like any property not actually rented that all un-incorporated vendors need to be sent a 1099 if we paid them more than $600. We don't separate the rental expenses from the non-rental expenses, so if a say an HVAC works on both a rental and a flip for us and the yearly bill is more than $600 we send them a 1099. We do not send a 1099 to CORPORATION like electric company, Home Depot, or any vendor that is incorporated.

The penalties for non-c0mpliance is that YOU as the vendee could be resposible for the Federal Income taxes of the VENDOR.

The $600 threshold is extremely low, I pay the huy who cuts my grass more than $600 a year. I think the $600 threshold goes back to the 1960 when the minimum wage was $1 (believe it or not). At that rate the $600 threshold provided 600 hours of service at minimum wage. Today as minimum wage goes to $15 in some areas that same $600 only buys 40 hours of wages. Just to keep up with the increase in minimum wage the $600 threshold should be $9,000 threshold for 1099s.