Jan 28
We have probably all been holding our breath to see if rental property ownership and management would be eligible for the new 20% small business tax deduction.  Last week it became clear that we are.  There are some documenting requirements that take effect this year that you need to learn more about.
From the IRS:
.03 Safe harbor. Solely for the purposes of section 199A, a rental real estate enterprise will be treated as a trade or business if the following requirements are satisfied during the taxable year with respect to the rental real estate enterprise:
• (A) Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise;
• (B) For taxable years beginning prior to January 1, 2023, 250 or more hours of rental services are performed (as described in this revenue procedure) per year with respect to the rental enterprise. For taxable years beginning after December 31, 2022, in any three of the five consecutive taxable years that end with the taxable year (or in each year for an enterprise held for less than five years), 250 or more hours of rental services are performed (as described in this revenue procedure) per year with respect to the rental real estate enterprise; and
• (C) The taxpayer maintains contemporaneous records, including time reports, logs, or similar documents, regarding the following: (i) hours of all services performed; (ii) description of all services performed; (iii) dates on which such services were performed; and (iv) who performed the services. Such records are to be made available for inspection at the request of the IRS. The contemporaneous records requirement will not apply to taxable years beginning prior to January 1, 2019.

.04Rental services. Rental services for purpose of this revenue procedure include: (i) advertising to rent or lease the real estate; (ii) negotiating and executing leases; (iii) verifying information contained in prospective tenant applications; (iv) collection of rent; (v) daily operation, maintenance, and repair of the property; (vi) management of the real estate; (vii) purchase of materials; and (viii) supervision of employees and independent contractors. Rental services may be performed by owners or by employees, agents, and/or independent contractors of the owners. The term rental services does not include financial or investment management activities, such as arranging financing; procuring property; studying and reviewing financial statements or reports on operations; planning, managing, or constructing long-term capital improvements; or hours spent traveling to and from the real estate.

I read this as 250 hours of you, your employee’s or even contractors’ time, which is illogical, but as this is the government … Others, much smarter than I interpret it similarly

From JDSupra:
To qualify for the safe harbor, a rental operation must meet three requirements. In general, it must (1) maintain separate books and records for each rental enterprise, (2) involve the performance of at least 250 hours of rental real estate services each year (which, according to Treasury officials announcing the safe harbor, may be performed by employees or contractors other than the taxpayer), and (3) maintain contemporaneous records regarding the rental real estate services performed. Certain rental real estate arrangements are excluded from the safe harbor, such as real estate rented or leased under a triple net lease, as specifically defined in the proposed revenue procedure.

From Journal of Accountancy

 Under the proposed safe harbor, a “rental real estate enterprise” would be treated as a trade or business for purposes of Sec. 199A if at least 250 hours of services are performed each tax year with respect to the enterprise.The IRS says this includes services performed by owners, employees, and independent contractors and time spent on maintenance, repairs, rent collection, payment of expenses, provision of services to tenants, and efforts to rent the property. However, hours spent in the owner’s capacity as an investor, such as arranging financing, procuring property, reviewing financial statements or reports on operations, and traveling to and from the real estate will not be considered hours of service with respect to the enterprise.

Dec 28

It is clearly advantageous for most people who have businesses or itemize their personal deductions to pay as many deductible items as possible in the next couple of days.  (Of course, check with a tax pro and not rely on some landlord you found on the internet before acting)

This could include property taxes, general bills due in the next 60 days, and state estimated income taxes. Perhaps if you have subscription based software etc., you could get a discount by switching to annual instead of monthly payments and move that payment into 2017. Same if you are on an installment plan with insurance let’s say.

We paid as much as we could and I’m feeling a bit broke today.  Knowing so many others had to do the same, it got me to thinking.

My prediction is retail and things like autos and refrigerators are not going to sell well for at least the first quarter of 2018 as so much was spent by small business owners in the final two weeks of 2017.

If you are into the stocks and options, perhaps there is an opportunity to make some money, knowing that the economy will be depressed for a couple of months as people recover from the forced spend to move tax deductions into 2017. (But again, don’t take my advice as I am Just A Landlord)

Dec 21

This week’s tax change is large and complex.  I’m sure attorneys and accountants will be kept employed for years, determining what it means to the rental industry.   In my search for answers I found a good article that is worth sharing.

Final pass-through rules help some firms more than others

A new exclusion or deduction of 20 percent of ‘qualified business income’ will effectively reduce the tax rate on such income by 20 percent. Thus, qualified income otherwise taxed at the top rate of 37 percent will be taxed at 29.6 percent. Income otherwise taxed at 24 percent, for example, will be taxed at 19.2 percent. Self-employment or net investment income taxes, where applicable, would be in addition to these amounts.

Feb 11

A reader asks:

I would like to know if all of you fill these out for tenants? I have had several to complete and return to them. They take time and the financial benefit is for the tenant. Does anyone know if we are required to complete them?

The short answer is yes,  you are required to complete the Homestead Credit Form.

Some guidance from the State of WI Dept of Revenue

Feb 23

Call your favorite federal representative or senator and tell them to support the following:

On February 17, the House Ways and Means Committee approved H.R. 705, the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayment Act of 2011.

This bill will remove the requirements to give 1099 to suppliers of goods and to corporate service providers.  It also will remove the requirement for SMALL landlords to submit 1099’s

Also on February 17, the Senate voted to pass the FFA bill S 223 that also removes the 1099 requirements for suppliers of goods and to corporate service providers.

What are changes to  the 1099 rules and why they need to be changes?  Read my prior post here:

Much more paperwork for landlords in 2011

With or without changes the issue of having your contractors reclassified as statutory employees is a real risk:

Your handyman – cheap contractor or $60,000 mistake?

Feb 05

Accounting Today has a good article on the Senate bill to amend the 1099 filing requirements

It looks like if this is signed into law we won’t have to send 1099s to the Home Depot.

However this does not appear to repeal the new 1099 requirements under the Small Business Jobs Act for landlords

As you recall the Small Business Jobs Act expanded the1099 reporting to all landlords when they pay more than $600 to non-corporate service providers such as your local handyman.

Dec 18

Efforts to repeal the 1099 reporting provision in the Obama Health Care Bill fails. Bad news in many respects for small property owners and businesses.

Owners who are unaware of the new 1099 provision will either get caught up in the whole ‘your contractor is a statutory employee’ argument or lose legitimate deductions for work performed.  If you are not up to speed on the problems you can face by improperly classifying what the government considers an employees that you are treating as a contractor read this post

I am being told that you may even have to file a 1099 on your local government for services like sewer, water and trash collection or lose those deductions.

This will be a HUGE paperwork nightmare even for those of us that only use regular employees for our maintenance. I can hear hectares of tress falling in the background to make the paper that will be needed even as I write.  But at least this will solve unemployment as it will take a heck of a lot of people to process the billions of 1099s this will generate. And jobs that are simply shuffling papers add nothing to the productivity of our nation, putting us another step behind other countries as we vie for market shares in a down economy.

From the National Apartment Association

1099 Repeal Effort Fails

Efforts to include a repeal of onerous new 1099 reporting requirements enacted in the health care reform law (P.L. 111-148) were unsuccessful.

Starting in 2012, businesses will be required to file a 1099 report to every business from which it purchases more than $600 in goods and services. (Prior law restricted the reporting requirement to the purchase of $600 or more in services only.)  See my note below* –Tim

Despite bipartisan agreement that the provision should be repealed, there is no agreement over how it should be paid for.  As a result, repeal provisions were not included in the tax bill and is not expected to pass before the lame-duck session adjourns.  Lawmakers are expected to take up the issue early in the 112th Congress, and NAA/NMHC will continue to aggressively advocate for repeal.

*More accurately the old law also excluded services performed by corporations. The new law includes all services and purchases over $600 per year per vendor.  This greatly increases the number of 1099s required.  Also most smaller property owners were exempt under the old law,  Not so now.  If you own a single home that you rent you are subject to this.

Oct 01

We use employees almost exclusively, for a number of reasons.

Worker Comp insurance is important as your homeowner’s policy does not cover people working on your property.

More importantly the tax implications if a contractor is reclassified as an employee.

Why is the tax issue more important than the workers comp? You can and should have a worker comp policy even if you feel most of your worker bees are contractors.  So go out, get it and sleep well.

Now onto the consequences of a contractor being reclassified as an employee for tax purposes.  A number of years ago we had a lady who cleaned carpet for us.  She had her own machine.  She used her own chemicals.  She charged a fixed rate based on the number of rooms.  She had a number of other clients at the time we started using her. We found her through an ad she ran in the Shopper.  And she set her own schedule.

Well she also had a full time job and was laid off after she began doing our carpets.  She did not earn enough at the full time job to get the top unemployment benefit so she decides to include the earners from carpet cleaning to up the benefit.  The state ruled that she was an employee based on the following: She never filed taxes for the carpet cleaning income.  She did not have a FEIN.  At the time she was laid off we were her only remaining client.  And ONE time we told her a job absolutely positively had to be done on a certain date.  Well had I hired Adelman to clean the carpets I would have told them the same thing on that job.

Over a six month time period we paid her a bit over $400 for doing a dozen carpets.  The penalties and taxes we had to pay due to the reclassification were a bit over…$400.

You would have thought the government would have shown us some consideration as we had fifty some payroll  employees that year, so clearly we were not trying to skirt the law. But they use a 21 step test.  Fail an important one, or a few lesser ones and the person doing the work is an employee.

But $400 was a cheap lesson I guess. Earlier this year I spoke to an AASEW member and part time landlord who is fighting $20,000 in penalties.  Just last week I spoke to yet another part time landlord who is facing $60,000 in penalties due to reclassification of his “contractors” to employees. If you get this wrong and don’t file the proper employment tax forms the government can look back for something like six years.

And calling your workers contractors is became much more risky with President Obama’s signing of a new 1099 provision into law this week.

Today, unless I can find you in the Yellow Pages and you want to work for us it will be as an employee.

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