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Reporting Unclaimed Property

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As a business owner, you’ve probably received a notice from the Michigan Department of Treasury advising you to report and turn over to the state any unclaimed property you have.  Many businesses have unclaimed property resulting from normal operations.  Some examples include uncashed payroll checks, uncashed vendor checks, credit balances on accounts receivable, etc.  Any of these assets must be reported and turned over to the state if they remain unclaimed for a certain period of time.  For example, uncashed payroll checks must be reported and turned over to the state after one year and uncashed vendor checks must be reported and turned over to the state after three years.

The due date for filing the unclaimed property annual report is July 1, 2012 for property reaching its dormancy period (e.g., one year for uncashed payroll checks) as of March 31, 2012.

Example:  You issue two paychecks.  The first paycheck is issued March 27, 2011 and the second is issued April 3, 2011.  The March 27 paycheck is dormant for one year on March 31, 2012, and must be reported and turned over to the state by July 1, 2012.  The second paycheck issued on April 3, 2011 has not been dormant for one year on March 31, 2012 and must not yet be reported.  If this paycheck remains unclaimed on March 31, 2013, it must be reported and turned over by July 1, 2013.

Penalties for Not Filing or Turning over Unclaimed Property

Penalty and interest may be assessed as follows:

  • interest at 1% over prime per month on the property or the value of the property from the date the property should have been paid and/or
  • penalty at 25% of the value of the property that should have been paid

If the state audits a business for compliance with unclaimed property reporting, the state can go back 10 years.  A concern is that the state is outsourcing its audit function to third party auditors who are paid on a contingency basis based on the amount of unclaimed property they find.  Additionally, third party auditors may only audit a recent period, then extrapolate the value of any unreported unclaimed property over the ten years.  This could result in substantial penalties and interest.

If You Don’t Have Unclaimed Property

If you are certain you don’t have unclaimed property to report and pay over, you can file Form 4305, Attestation of Compliance with Unclaimed Property Reporting, by January 31, 2012.

Voluntary Compliance Agreement

The state is providing businesses that have not previously reported or have underreported unclaimed property in the current and past four years with an opportunity to comply with the reporting and payment requirements by entering into a Voluntary Disclosure Program by filing Form 4869.  The program will waive all penalty and interest on property voluntarily submitted to the state.  The deadline to enter into this agreement is January 31, 2012.

Questions…

There is some uncertainty about whether the Department of Treasury has the authority to enter into these Voluntary Compliance Agreements or to require business to report when they DO NOT have unclaimed property.  The State Bar of Michigan issued an email to its members this past week questioning the Department’s ability to impose these requirements.   The State Bar issued a letter to the Department of Treasury regarding the uncertainty of these requirements.  The State Bar has not yet heard back from the Department.

So…if you have any questions regarding this issue please feel free to contact us.

IRS Provides Relief in Employee vs. Independent Contractor Disputes

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An issue that has been getting more attention from the IRS is worker classification.  This issue deals with whether you treat people who provide services for your business as employees or as independent contractors.  Generally, employers would rather treat service providers as independent contractors for the following reasons:

  • employers do not have to pay payroll taxes on amounts paid to independent contractors
  • employers do not have to provide employee benefits to independent contractors
  • employers do not have to pay workers compensation premiums for independent contractors (assuming the independent contractor has her own workers compensation policy).

Whether a service provider is an employee or independent contractor depends on the amount of control the employer has over the service provider.  A greater amount of control would tend to increase the likelihood that the service provider is an employee.

When an employer has been treating a service provider as an independent contractor, and the IRS later reclassifies the service provider as an employee, the employer will be liable for payroll taxes for the years at issue plus penalties and interest.  This can be a substantial balance due.

Example:  Over the past three years, ABC Corp has paid $600,000 to independent contractors.  The IRS reclassifies the independent contractors as employees.  ABC Corp is now liable for back payroll taxes of roughly $60,000 plus penalties and interest (which could amount to several thousand dollars more).

The Relief Provision

The IRS wants to encourage employers to voluntarily resolve their worker classification issues.  The IRS recently added a program (the Voluntary Classification Settlement Program [VCSP]) that provides partial relief from federal payroll taxes for eligible employers who agree to prospectively treat service providers as employees.

A employer who participates in the VCSP will agree to prospectively treat the service providers as employees for future tax years.  In exchange, the employer will pay 10% of the payroll tax liability that would have been due on amounts paid to independent contractors for the most recent year, determined under the reduced payroll tax rates (10.25% in 2011 and 10.68% in 2010).

The employer will not be liable for penalty or interest, and will not be subject to an workers classification audit for prior periods.  However, the employer must agree to extend the period of limitations on assessments of employment taxes for three years for the first, second, and third years following the year the VCSP is approved.

Example:  Same facts as in above example except that ABC enters into a VCSP in January 2012.  ABC paid its service providers $200,000 in 2011.  Under the VCSP, ABC owes $2,056 to the IRS.  ABC will not be liable for penalties and interest.  The $2,056 balance due is equal to the payments to service providers for the prior tax year of $200,000 multiplied by the reduced payroll tax rate of 10.25% times 10%.  Under the VCSP, ABC is not liable for the payments to its service providers for 2009 and 2010.  ABC will treat its service providers as employees beginning 2012.

To enter into a VCSP, the employer must:

  • submit an application (Form 8952)
  • have consistently treated the service providers as independent contractors
  • have filed all Forms 1099 for the prior three years
  • not be under IRS, Department of Labor, or state audit

Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.

It’s Not as Easy Being Green

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The past few years, Congress has allowed tax credits for energy efficient home improvements.  In 2009 and 2010, the tax credit for building envelope and qualified energy property (discussed below) was equal to 30% of qualifying expenses up to a $1,500 credit.  Tax credits for alternative energy products (solar, wind, geothermal) were equal to 30% of such expenditures without limit.

Beginning January 1, 2011, Congress substantially reduced the amounts of such credits.  This post will discuss two home energy efficiency tax credits:

  • Credit for Nonbusiness Energy Property
  • Credit for Residential Energy Efficient Property

Credit for Nonbusiness Energy Property

This credit equals the sum of:

  • 10% of certain costs for property installed to improve the energy efficiency of existing homes (these costs are referred to as building envelope components)
  • 100% of costs for residential energy property expenses (subject to dollar limitations for each specific type of property)

Building envelope components (10% credit) include:

  • insulation
  • exterior windows (including skylights)
  • exterior doors
  • certain metal and asphalt roofs designed to reduce heat gain

It is important to note that these credits only apply when such property is installed in your principal residence.

For building envelope components, the credit is allowed only for amounts paid to purchase the components (i.e., the credit is NOT allowed for onsite preparation, assembly, or original installation).

Residential energy property (100% credit) includes:

  • electric heat pump water heaters (up to $300)
  • electric heat pumps (up to $300)
  • biomass fuel stoves (up to $300)
  • high-efficiency central air conditioners (up to $300)
  • natural gas, propane, or oil water heaters (up to $300)
  • natural gas, propane, or oil furnaces or hot water boilers (up to $150)
  • advanced main air circulating fans (used in natural gas, propane, or oil furnace) (up to $50)

The credit for qualified energy property is allowed for amounts paid to purchase the property as well as for onsite preparation, assembly, or original installation.

In prior years, the credit was not subject to the $50 to $300 limits.  The credit was equal to 30% of the expenses up to a $1,500 credit.

In 2011, there is a lifetime maximum nonbusiness energy property credit of $500 ($200 for exterior windows and skylights), taking into account all such credits allowed to the taxpayer for years ending after December 31, 2005.  This limit includes credits for building envelope components and for residential energy property.

Credit for Residential Energy Efficient Property

Clear your mind of the above rules.  This is a completely separate credit.

This credit is equal to 30% (without limit) of the cost of qualified:

  • solar electric property
  • solar water heating property
  • fuel cell property
  • small wind energy property
  • geothermal heat pump property

The rule for this credit has not changed from prior years—the credit is still equal to 30% of the costs of such property without limit.  This credit is allowed for amounts paid to purchase the property as well as for onsite preparation, assembly, or original installation.

This credit applies when the property is installed in your residence (the statute does not require it to be your principal residence).  It is therefore possible that you can claim a credit for this credit on a vacation home (although it would be best to wait for IRS guidance on the issue).

Both the credit for nonbusiness energy property and credit for residential energy efficient property are nonrefundable credits that can be used to offset both regular tax and alternative minimum tax.

One final note—taxpayers may rely on written manufacturer certifications that the property is qualified for these credits.

Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.

Changes (some scary) to Michigan’s Personal Income Tax

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Our previous posts have described changes in Michigan tax law regarding pension income and business taxation.  This post will highlight changes to Michigan’s personal income tax.  These changes are generally effective January 1, 2012.

A list of the most relevant changes:

  • Political contributions will no longer be deductible.  Previously, Michigan allowed up to a $50 deduction for political contributions ($100 on a joint return)
  • Senior citizens will no longer be able to exclude a portion of interest, dividends, and capital gains received.
  • Taxpayers will no longer receive an additional $600 exemption per dependent child under age 19
  • Charitable contributions from retirement accounts will no longer be deductible for Michigan tax purposes
  • The additional exemption allowed for each taxpayer age 65 and older will be eliminated

There will also be substantial changes to the Homestead Property Tax Credit.  This credit is based on the property taxes assessed against your principal residence and its maximum amount is $1,200.  It is calculated as:

(Property Taxes Assessed – 3.5% of Household Income) * 60%

For senior citizens, the 60% at the end of the formula is increased to 100%.

The credit begins to phase out when Household Income exceeds about $73,000.

Changes to the Homestead Property Tax Credit:

  • a taxpayer will no longer be eligible for the credit if the taxable value of her homestead exceeds $135,000 (for a new home, this limit equates to a sale value of $270,000)
  • the credit will be phased out starting at $41,000 of household resources and will be completely phased out at household resources of $50,000
  • the 60% and 100% applicable percentages for non-seniors and seniors will be eliminated.  In its place will be an applicable percentage phase out based on household resources:
    • Those with $21,000 of household resources and lower will have an applicable percentage of 100%
    • The applicable percentage will phase out four percentage points for every $1,000 of household resources above $21,000.
    • The minimum applicable percentage will be 60%.

Under prior law, the Homestead Property Tax Credit was based on household income.  Under the new law, the credit will be based on household resources.  The primary difference between the two concepts is that household resources would exclude any subtractions due to net business, rental, or royalty losses.

Example:  John has W-2 income of $70,000 and a business loss of $30,000.  His household income is $40,000.  John pays property taxes of $2,000.  Under old law, his property tax credit would be based on the amount of his property taxes exceeding 3.5% of household income.  Subject to the applicable percentage, John property taxes eligible for the credit are $600 ($2,000 property taxes less $1,400 (which is 3.5% of household income of $40,000).

Under the new law, John’s household resources are $70,000 (household resources do not take into account business losses).  3.5% of his household resources is $2,450.  Since John’s property taxes of $2,000 don’t exceed 3.5% of household resources, John cannot take the property tax credit.

Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.

Business Credit Card Sales Will Now Be Reported to the IRS by Credit Card Processors.

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The IRS is looking for ways to close the tax gap (the amount of tax that should be paid compared to the amount of tax that is actually paid).  The annual tax gap is roughly $340 billion per year.

To help the IRS locate more unreported income, Congress passed a law requiring credit card processing companies to report to the IRS the amount of credit card sales its customers receive.  The law takes effect this year.  In other words, if your business accepts credit cards, your credit card processor will report your credit card sales to the IRS (in early 2012 you will receive a Form 1099-K showing 2011 credit card sales).

The Form 1099-K will report your total credit card sales for the year, as well as monthly credit card sales.  A draft copy of the form can be viewed here.

The State of Michigan may also have some interest in viewing the monthly and total sales on these forms to make sure that all sales are being reported for sales tax purposes.

Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.

Don’t Expect an Elton John Tribute Song to the Death of the MBT

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This is the last year for the Michigan Business Tax.  On January 1, 2012 Michigan C corporations will be subject to a 6% income tax.  Flow through entities such as S corporations, LLCs, and partnerships will no longer be subject to a business level tax.  The owners of flow through entities will pay tax on their business income on their personal returns, as they currently do. 

Michigan will therefore treat flow through entities as they are treated at the federal level.  At the federal level, C corporations pay income tax on their profits at the business level.  When the C corporation pays a dividend, buys back stock from its shareholders, or the shareholders sell their stock to a third party, the shareholders pay income tax at the personal level.  This is double taxation.

For flow through entities, the business does not pay a business level tax.  Instead, the profit flows through to the owner.  The owner pays tax on the annual business profit (whether or not distributed).  The owner will then be able to withdraw the profit from the business without paying tax.  Thus, there is only a single layer of tax.

Under the MBT, business owners of flow through entities were subjected to double taxation.  First, the business would pay MBT at the business level.  Then, business owners would pay tax on the business profit on their personal returns.  Double taxation for flow through entities under the MBT was even harsher than double taxation for C corporations at the federal level because, at the federal level, C corporation shareholders would not be subject to double taxation until they received cash through a dividend, share buyback, or sale of their stock.  Under the MBT, business owners paid two levels of taxation even if they did not take cash out of the business. 

Example: C corporation has profit of $200,000.  It pays corporate level tax of $61,000.  Let’s assume it pays $12,000 in MBT.  The shareholders do not pay a personal level tax under either federal law or MBT if they did not receive dividends or sell their stock to the corporation or to a third party.

Now assume the above corporation was an S corporation.  At the federal level, the shareholder pays personal income tax on the $200,000 of profit.  Assuming a 30% income tax rate, the shareholder pays tax of $60,000.  There is no business level federal tax.  At the state level, the S corporation still pays the $12,000 MBT, AND the shareholder pays personal income tax of $60,000 on the S corporation profit of $200,000.  The flow through business owner is subject to double tax even if the shareholder took no money out of the business.

Under the Corporate Income Tax (CIT), the business would not be subject to tax at the business level.  The shareholders would continue to be taxed on their personal returns.  The shareholders in this example saved $12,000 they previously paid in MBT.

The new CIT of 6% that applies only to C corporations will be very, very helpful to flow through entities. 

To say that CIT is much simpler than the MBT would be an understatement.  Here are some characteristics of the CIT:

  • C corporations with gross receipts under $350,000 are exempt from CIT
  • There is a small business credit for small business that effectively reduces the 6% tax rate to a 1.8% tax rate
    • To qualify, a business must have gross receipts of $20 million or less and have adjusted business income of $1.3 million or less
    • Adjusted business income is basically business profit plus shareholder/officer compensation
    • this credit existed under both the SBT and MBT and is retained for the CIT
  • Taxpayers who have certain credits can continue to file MBT returns to continue claiming these credits.

More to come on the new Michigan tax laws.  Stay tuned.

Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.

Michigan’s New Tax Rules on Pensions

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This post is the first of a series explaining the new Michigan tax laws which are about to be signed into law. 

Here, we’ll discuss the changes affecting pension income. 

Historically, Michigan allowed an exemption for pension income.  For those with private pensions (e.g., 401k plan from GM or an Individual Retirement Account), the State allowed a $45,120 exemption in 2010 ($90,240 for joint filers) from taxable income.  For public pensions (i.e., government pensions), the exemption was unlimited—there was no tax on public pension income regardless of amount.

The original plan was to subject seniors’ entire pension income to Michigan’s 4.35% income tax.  This caused a bit of a stir.  The pension tax, in its final form, applies different tax rules to three age ranges. 

The age ranges are:

  • Those born before 1946
  • Those born between 1946 and 1952
  • Those born after 1952

On a joint return, it is the year of birth of the older spouse that controls the tax treatment of both spouses’ pensions.

Born before 1946

Those born before 1946 will see no change in how their pension income is taxed.  Social Security income is fully exempt from Michigan tax.  Seems simple so far, but wait…

Born between 1946 and 1952

If a taxpayer is born between 1946 and 1952 and is under 67 years old, the exemption amounts are changed to $20,000 for a single return and $40,000 for a joint return regardless of whether the income is from a private or public pension.

If a taxpayer is born between 1946 and 1952 and is 67 years old or older, the exemption amounts remain at $20,000/$40,000 but apply to both pension and non-pension income.  This provision helps seniors because they now have a large exemption that can apply to non-pension income such as wages or business profit.

Social Security income is fully exempt from Michigan tax. 

The $20,000/$40,000 exemption amounts are completely phased out if Household Resources exceed $75,000 on a single return or $150,000 on a joint return.

Born after 1952

If a taxpayer is born after 1952 and is under 67 years old, the new law eliminates any exemption of private or public pension.  Social Security income is still exempt from Michigan tax.

If a taxpayer is born after 1952 and is 67 years old or older, the new law allows the $20,000/$40,000 exemption for ALL types of income—public and private pensions, non-retirement income, and Social Security income. 

Under this provision, Social Security income has to be sheltered by the $20,000/$40,000 exemption amounts.

Example:  It is 2020, John is 67 years old and he was born in 1953.  John has $15,000 in Social Security Income and $30,000 in private pension income.  John is married so he is entitled to a $40,000 exemption.  John must use $15,000 of his exemption to shelter his Social Security income.  John has a $25,000 remaining exemption to shelter his $30,000 pension income.  John will pay tax on the remaining $5,000 pension income.

If John was born in 1952, his Social Security income would be exempt from tax without having to use his $40,000 exemption.  Thus, his full $40,000 exemption would fully shelter his $30,000 pension income.

The $20,000/$40,000 exemption amounts are completely phased out if Household Resources exceed $75,000 on a single return or $150,000 on a joint return.

Tax simplification!!!

There’s a lot more in this new law to cover.  Stay tuned for more updates.

Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.

State of Michigan Offering Tax Amnesty between May 15, 2011 and June 30, 2011

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The Michigan Tax Amnesty program provides a 45 day period for taxpayers to settle tax liabilities with the State for tax periods ending on or before December 31, 2009.  The Amnesty allows taxpayers to avoid civil and criminal penalties and criminal prosecution by the Michigan Department of Treasury.  The 45 day periods begins May 15 and ends June 30 of this year.

One rather large caveat is that the Amnesty requires FULL payment of all taxes and interest during the Amnesty period (i.e., between May 15 and June 30 of this year).

Example:  ABC Inc owes MBT tax of $30,000, interest of $5,000 and penalty of $3,000.  Under the Amnesty, ABC Inc can settle its tax liability for the tax and interest amounts due $35,000.  It can avoid the $3,000 penalty.  However, the full $35,000 must be paid by June 30, 2011.

Failure to pay all of the tax and interest due will result in Amnesty being denied.  When Amnesty is denied, penalties will not be waived and criminal prosecution may be sought.  Basically, the State will continue to pursue taxpayers as it was doing before the Amnesty application was filed.

The Amnesty is available for personal and business taxpayers who have eligible tax liabilities.  Eligible tax liabilities include:

  • underreported tax liabilities
  • non-reported tax liabilities
  • overstated deductions, credits, or exemptions
  • failure to file Michigan tax returns
  • delinquent payment of past taxes due
  • taxpayers who have received a final tax due notice
  • local (i.e., city county) taxes, including real and personal property taxes, do NOT qualify for Amnesty.

A taxpayer who is eligible to participate in the Amnesty but does not do so will be subject to tax, accumulated interest, and penalty due.  Civil penalties will not be waived and criminal prosecution may be sought.

To obtain Amnesty, a taxpayer must submit the following:

  • a completed Tax Amnesty Application (Form 3855)
  • all un-filed tax returns for which Amnesty is being sought
  • amended returns if applicable
  • a completed Registration for Michigan Taxes, if you operate a business that has not registered for Michigan taxes
  • FULL PAYMENT OF ALL TAXES AND INTEREST DUE

 

Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.

Expanded 1099 Requirements Finally Repealed

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On April 14, the President signed into law the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011.  This law repealed both the expanded 1099 reporting requirements mandated by last year’s new health care law and also the 1099 reporting requirements imposed on taxpayers who receive rental income which was mandated by last year’s Small Business Jobs Act.

Last year’s health care law expanded the 1099 reporting requirements to include all payments from businesses totaling $600 or more in a year to a single recipient for purchases of property.  The term “property” had a broad meaning and would require businesses to issue SUBSTANTAIILY MORE 1099s.  This expanded 1099 requirement was going to become effective January 1, 2012 but is now repealed.

Last year’s Small Business Jobs Act added a new 1099 reporting requirement to people who rent out real estate.  The Jobs Act required landlords to issue 1099s to vendors who provided them with services if the amount paid to the vendor was at least $600.  Landlords would have started to issue 1099s to repair companies, utility companies, lawyers, accountants, etc.  This law was going to become effective this year (January 1, 2011), but is now repealed.

One provision that was NOT repealed was the increased penalties associated with not filing 1099s that are currently required by law and for filing 1099s with incorrect information.  The penalties have essentially doubled and range from $30 per incorrect/late 1099 to $100 per incorrect/late 1099.

Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.

Nightmare for People Who Rent Out Real Estate Starts This Year

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There has been quite a bit of chatter about the new 1099 reporting requirements for businesses beginning with expenses paid in  2012.  There has been much less chatter about the 1099 reporting requirement that became effective for payments made on or after January 1, 2011 (yes, this year) for taxpayers who have rental income from real property rentals.

The Small Business Jobs Act of 2010 requires taxpayers who lease out rental real estate to issue 1099s to persons and corporations to whom taxpayers make payments totaling $600 or more in a year.  Examples of  covered payments include repairs, premiums, property and equipment, payments to accountants >:-( , etc.

Bottom line–starting this year, if you rent real estate you have to start tracking exact amounts paid to each vendor, collect a Form W-9 to obtain the vendor’s EIN and address, issue that vendor a 1099 at year end, and send a copy of the 1099s you issued to IRS.

Certain taxpayers are exempt from this 1099 reporting requirements.  These exempt taxpayers include:

  • individuals who can show that reporting is a hardship (good luck with this one)
  • individuals who receive a minimal amount of rental income
  • certain military personnel
  • The IRS is expected to issue guidance on these exemptions.
Other 1099 reporting requirements
The 1099 reporting requirements for all businesses begin for payments over $600 per vendor made after December 31, 2011.  This will be a bookkeeping nightmare for business owners.  
Example:  You buy gas throughout the year at three gas stations.  Two of the gas stations are Marathons and one is a Sunoco.  You spend $500 at each location.  If the two Marathon locations are separate corporations, you do not have to issue any 1099s since the total payments to each corporation are under $500.  However, if the two Marathons happen to operate within the same corporation, you will have to issue a 1099 to the Marathon.  How will you know if the Marathons operate under the same corporation?  You’ll have to get a Form W-9 from each location to see if they operate under the same corporation.  In fact, you’ll pretty much have to get a Form W-9 for any business expense if it’s possible that you may spend more than $600 with that vendor.  

There is an exception for payments you make via credit card.  If you make a payment by credit card, you will not have to report that payment on a Form 1099.  The reason is because credit card companies will have to start reporting credit card receipts by businesses beginning January 1, 2011.  Since the credit card company is already reporting the revenue received by the vendor from its transaction(s) with you, you do not have to report the same transaction amount on a Form 1099.
Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.

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