The recently enacted Healthcare Reform and 2010 Small Business Jobs Act includes an assortment of changes for small businesses. It also contains two significant changes for information reporting by taxpayers. As indicated below, this includes individuals who own rental property as a passive investment.
Who is affected by these changes?
Under the present law, information reporting (via form 1096 and 1099) is required to the IRS by all persons engaged in a trade or business who make certain payments in the course of that trade or business of $600 or more in any tax year to another person or non tax exempt organization. These payments include rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable income. Under present law, a rental real estate activity that is a passive investment is not subject to this reporting requirement.
The new law (effective for payments made after December 31st, 2010) requires all taxpayers receiving rental income (including passive investments) from real property to file information returns with the IRS for rental property expenses of $600 or more during the tax year.
The following are exceptions to the new law:
– Any individual, including those who are active members of the uniformed services or employee of the intelligence community, if substantially all rental income is derived from renting their principal residence on a temporary basis.
– Any individual that receives rental income of not more than the minimal amount, as determined by IRS regulations.
– Any individual for whom these reporting requirements would cause hardship, as determined by IRS regulations.
Expansion of the definition of reportable payments
The Healthcare Reform Act passed in 2010 also expands the definition of reportable payments and which payments must be reported to the IRS. The Act states that amounts paid in consideration for property and gross proceeds are considered payments and are now subject to information reporting in addition to the other payment types listed above. In addition to expanding the types of payments, the new law also makes a change that expands the type of vendors for which payments should be reported to all vendors (including corporations).
For example, this means that if the total annual payments to your local office supplier exceeds $600, that total is required to be reported to the IRS.
This change will expand the number of providers for which payment information has to be reported for and create more work for the taxpayer. This new rule is effective for payments made after December 31, 2011. It is important to note that these expanded reporting requirements do not apply to payments made on a credit card.
Summary and Example
With these increased reporting requirements and the necessary information to properly complete the reporting forms, the recipient of the reportable payments must provide a Form W-9 to the payor. If that form is not provided, the payor is required to “backup withhold” tax at a rate of 28 percent of the gross payment. This withholding must be done unless the payee has established that the income is exempt from this backup withholding.
For example, an owner of a rental property accumulates the following rental expenses over the course of the year:
- A washer/dryer unit from Sears – $1,000
- A toilet from Home Depot – $300
- Carpeting from Home Depot – $500
- Paint from Wal-Mart – $200
The reporting requirements would be as follows
- Sears – A W-9 would be required as one purchase totaled over $600.
- Home Depot – A W-9 would be required as two purchases totaled over $600.
- Wal-Mart – No W-9 would be required as the purchase was under $600.
A taxpayer that fails to comply with these information reporting requirements will be subject to penalties. These penalties include failure to file the information, failure to furnish payee statements, and/or failure to comply with other various reporting requirements. These penalties are $50 per penalty per return up to a maximum that ranges from $100,000 to $250,000.
In other words, you are responsible for providing a W-9 from your vendors or you will be responsible for the penalties.
At this point congress has come out and said that these changes do create information reporting requirements that could be a problem for many businesses. Based on the changes after the recent election we will have to keep an eye on this topic to see what if any changes are made to these new laws.
For more information or questions on these new regulations, contact Dave Walter at 440-449-6800.