Real estate investors take note: January 1, 2011, is the starting date for new 1099 Reporting rules.
Effective January 1st, you must track payments you make to all businesses and individuals that you buy services from. Once you have paid $600 or more to any one business or person in connection with any kind of rental property expense, you’ll need to report those payments to the IRS, and issue each person or business a form 1099-MISC next January.
Does everyone have to do this? No. The new law makes a specific exemption for property owners who are in the military or the intelligence community and who are renting out properties on a temporary basis (i.e, while you’re on assignment). There’s also a vague reference to anyone who would experience a hardship in complying, although what that actually means hasn’t yet been clearly defined.
So, what information do you need to get? Normally when you are going to send someone a 1099-MISC, you first ask them to fill out an IRS Form W-9. It’s a simple, 1-page form that asks for:
Business and/or Individual’s Name and Address
Business and/or Individual’s status (i.e, corporation, LLC, sole proprietor, etc.)
Social Security Number (for sole proprietorships and individuals)
Tax ID Number (for applicable business entities
On a W-9 form, the Social Security Number and Tax ID Number are the keys. Without these, the IRS can’t properly match up the 1099-MISC forms that you report, with the copies that are filed by the people and businesses you give them to. If you don’t prepare and file 1099-MISCs, or if your data is wrong, it will be on you to fix it or face fines and penalties unless you can show that you properly reported what you were given.
Does this apply to personal expenses as well as business expenses? The requirement to collect Form W-9s and send out 1099-MISCs is limited to those individuals and businesses who receive from the rental of real estate properties. Only those expenses that are connected to your real estate will apply.
Does this apply to goods I buy (hardware, appliances, etc.) as well as services? Not in 2011. In 2011 you will only be collecting information from service providers. But in 2012, additional requirements kick in that apply to goods you buy, plus expands the definition of who gets a 1099 to corporations as well as sole proprietors and individuals.
Who should I send W-9 forms to? All service providers connected to your real estate properties that you anticipate paying more than $600 in 2011. That could include things like: gardeners, painters, plumbers, and so on.
When is the best time to ask someone for a W-9? The best time is now, or as soon as you make your first purchase from someone next year. The later you leave it, the more difficult it can be. You may hire a contractor for a one-time job in April, only to find that company is no more, or the individual has moved, when you try to send a W-9.
What if a company or a person won’t give me a W-9? This is a tough decision. If you don’t have a Social Security Number or Tax ID number, you will be the one paying for it in the end. If someone won’t fill out a W-9, you maybe need to rethink doing business with them. Or, maybe you can make payment of their bill contingent upon receiving a signed Form W-9.
What if someone gives me incorrect information? Your best defense is a signed W-9, showing that you correctly reported the information you were given. That puts the onus back on the individual or business who gave you the W-9 in the first place.
Are you sure I have to do this? What law says that I have to? These requirements were tucked away in the Small Business Jobs and Credit Act, which passed in late September of 2010.
Doesn’t this start in 2012? No. Rental property owners begin collecting data on payments to service-providers in 2011. In 2012, the reporting requirement expands to include goods purchased, and corporations as well as individuals and Sole Proprietors.
I heard that I didn’t have to do this if I paid by credit card. Is that true? Are you exempt from collecting data and tracking payments if you use a credit card to make the payments? There’s been a LOT of confusion on this particular issue. Some say yes, others say no. The latest information we have says … “maybe.” Again, the IRS hasn’t finished creating the rules. Because of that, we can’t in all good faith tell you that you don’t have to worry about it when you use a credit card to pay for things. In fact, our position is just the opposite. Get the tax data you might need from everyone.
Where can I find a W-9 form? You can get one from the IRS’s website, www.irs.gov. And, we’ve also prepared a special 2-page letter that you can use. The front page sets out your request, and even reprints the two pieces of law that apply. The second page is a blank W-9 for the individual or business to complete and give back to you.
I thought Congress was going to fix this? There have been a couple of legislative attempts to kill or push off the new requirements. Unfortunately, neither attempt was successful. Right now, this is the law of the land. Any changes to this requirement realistically won’t come into effect until 2011, if at all.