The preamble to the Section 199A final regulations contains the following new sentence:
… taxpayers should consider the appropriateness of treating a rental activity as a trade or business for purposes of section 199A where the taxpayer does not comply with the information return filing requirements under section 6041.1
Tax code Section 6041 requires a trade or business to issue 1099s to certain vendors.2
So, the IRS is saying that you “should consider the appropriateness” of NOT giving 1099s to vendors if you are asserting that your rental property qualifies as a trade or business for the Section 199A tax deduction.
Before you make such a decision, consider first the new IRS safe harbor on 199A rentals and then some rental property history with 1099s.
You have two ways to prove that your rental property or activity is a trade or a business:
- The tax law without considering any Section 199A rules
- The IRS safe-harbor method (see IRS Creates a New “Safe Harbor” for Section 199A Rental Properties)
For the Section 199A tax deduction, whether you issue 1099s is irrelevant once you are inside the safe harbor. This doesn’t mean that the 1099s are irrelevant for all tax law.
1099 Rental Property History, Part 1
In 2010, the Small Business Jobs Act required all owners of rental properties to issue 1099s to service providers to whom they paid $600 or more.3 The exact words were contained (but now are repealed, as we explain below) in tax code Section 6041(h), which stated that solely for purposes of 1099 reporting, a person receiving rental income from real estate shall be considered to be engaged in a trade or business of
1099 Rental Property History, Part 2
The Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 repealed the 1099 reporting requirements imposed on rental property owners by the Small Business Jobs Act.4 Because of this timely repeal, the application of the more onerous 1099 issuance requirements never took effect.
Here’s how lawmakers explained the repeal provision.5
Under the provision, recipients of rental income from real estate who are not otherwise considered to be engaged in a trade or business of renting property are not subject to the same information reporting requirements as taxpayers who are considered to be engaged in a trade or business.
As a result, rental income recipients making payments of $600 or more to a service provider (such as a plumber, painter, or accountant) in the course of earning rental income are not required to provide an information return (typically Form 1099-MISC) to the IRS and to the service provider.
What to Do
This is pretty ugly, but you do add credibility to your claim that your rental is a trade or business if you give 1099s to your service providers.
Reminder. If you use the safe harbor for your rental, as we discuss in IRS Creates a New “Safe Harbor” for Section 199A Rental Properties, you don’t need the 1099s for the Section 199A deduction.
And the big question is whether your rental property produces taxable income. With no taxable income, the rental is useless for the Section 199A tax deduction because that deduction is limited to business income. (If aggregated, the property might produce an overall Section 199A benefit.)
What to Hope For
When the Small Business Jobs Act required rental property owners to issue 1099s to service providers, it contained exemptions from the 1099 requirements for
- individuals who receive only minimal amounts of rental income, as determined by the secretary in accordance with regulations, and
- individuals for whom the requirements would cause hardship, as determined by the secretary in accordance with regulations.
The 2010 law that required 1099 treatment beginning in 2011 was repealed in 2011, so the law did not take effect. Meanwhile, during that short time, the secretary did not propose any exceptions to the rental property reporting rules, so we have no idea how helpful these might have been.
If you think that 1099s are necessary to prove that your rental properties are businesses for Section 199A purposes and you believe that treatment is burdensome and unfair, make trouble.
- Call your representatives and senators. Dial 202-224-3121. (Phone calls are harder to ignore than email is.)
- Get your trade association to act on your behalf. (The American Institute of CPAs had a huge hand in undoing the 1099 requirement for rental property owners.)
You likely have not sent 1099s to your rental property service providers and probably don’t want to. We understand.
But to lock in your Section 199A deduction on your rentals, the 1099s can help you assert that your rentals rise to the level of a trade or business.
And as you read this, you likely have a problem with the 1099 filing deadlines, some of which were January 31.6 That’s the bad news. The good news is that if you hurry and file now, you can likely avoid any monetary penalties.
Don’t forget that you can ignore the 1099 issue for purposes of your Section 199A tax deduction when you use the safe harbor we discussed in IRS Creates a New “Safe Harbor” for Section 199A Rental Properties.
And consider this possibility: The new Section 199A tax deduction and the IRS comment on the 1099s in the preamble to the final regulations could easily focus more IRS energy on the previously dormant 1099s that were not being filed by a multitude of rental property owners. This could be an additional reason to start raising hell with your lawmakers so that they will exempt you from the 1099 requirements.
1 Preamble to Final Section 199A Regulations (released Jan. 18, 2019), p. 21.
2 IRC Section 6041.
3 Small Business Jobs Act of 2010, Pub. L. 111-240.
4 Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011, Pub. L. 112-9.
5 H.Rpt 112-16.
6 See the 2018 General Instructions for Certain Information Returns, Dated July 20, 2018, p. 26.