The 1099 That Ate Landlords
November 1, 2010
Hire a plumber and pay him over $600 in a year and you’d better tell the IRS about it, or else. How about that yard service that takes care of your properties’ grounds? Chances are, if you have more than a couple of properties, you pay them more than $600 in a year. You’d better tell the IRS about it, or else. If you hire a handyman to take care of repairs on your properties and he gets a total of more than $600 a year from you, you’d better tell the IRS about it, or else.
Buried inside the health care bill, that’s right, the health care bill, is an act that after a couple of changes is euphemistically entitled the “Small Business Jobs Act.” It requires rental owners, among other small businesses, to file a 1099 MISC for every vendor who provides more than $600 in services during the year beginning in January 2011, to be reported on the 2011 tax return. For those who are accountancy-impaired or indifferent that could be a major new cost in accounting, paperwork and head scratching.
You see, it doesn’t apply to just one-time events. That’s easy. It applies to all vendors whom you pay more than $600 total in the course of the year. That means you will also need to obtain the name, address and taxpayer identification number of each service provider, using Form W-9 or some similar form.
The law provides an exemption for those who can show that the requirement will create a hardship for them. What’s a “hardship.” The IRS is supposed to issue regulations on this, but hasn’t gotten around to it yet, so your guess is as good as the landlord’s across the street.
The law also contains an exception for individuals who receive rental income of “not more than a minimal amount.” Again, the IRS is supposed to figure out what constitutes “not more than a minimal amount” but that sits in the same in-box as the hardship exemption.
Now companies only need to send the 1099s to incorporated businesses for services that run past the $600 threshold in a year.
“The lawmakers are going to have to find a way to pay for this thing that they’ve created, but is it going to help? No,” said Chip Rankin in Delawareonline.com, whose company has 80 employees and does about $7 million in annual commercial carpet cleaning business..
“There are going to be a lot of businesses that are small and mid-sized that will hurt from this.” You think?
To make matters even more complicated, Michael Mundaca, Assistant Secretary of the Treasury, answering a question in the New York Times wrote, “We have used our administrative authority to exempt from this new requirement business transactions conducted using payment cards such as credit and debit cards. So, whenever a business uses a credit or debit card, no information report will need to be filed, and there will thus be no new burden under the new law.”
“No new burden,” huh. Think of the accounting nightmare that brings into play. We get receipts from vendors that may or may not indicate how we paid them, check or card. Now we have to try to sort out how we paid them so we can decide if we have to report the payments. But what happens if we pay them over $600 but partly by check and partly by card?
Then, what happens if we don’t have or can’t get a taxpayer ID number for a vendor? What if we buy things from eBay or Amazon acting as an intermediary? To whom do we send the 1099? Those questions lie expectantly in the same in-box along with the other clarifications the IRS is supposed to write.
One more question: since we only have to provide a 1099 MISC for over $600 in services, what happens when we hire a handyman, say, who provides goods as well as services? He will present a bill that may or may not have the two categories broken out, and we pay with one check. Now, at tax time we have to go back through all the receipts and sort out how much went to each category.
This new 1099 provision is supposed to bring in an additional $19 billion a year to help pay for the healthcare bill. Count on it costing small businesses, including rental property owners, at least that much. Congress is making noises like it will repeal that requirement. But what else will it do in the process and when is that likely to happen? What we know for sure is that this new law is job security for accountants.