Help! 2 Checks in 2 Different Yrs, 1 Capital Project, 1099/1096

4 Replies

I gave my contractor a deposit in December and final payment in January for a large structural repair job on a property that is partially personal (I live in one room) and partially business (my LLC) as a vacation rental.

Now I need to send him a 1099 and send the IRS a 1096 (late on both of these, I recently found out), and figure out which tax year to apply the payments.  I can't get the 1099/1096 situation resolved until I know what year(s) to begin capitalizing.  The project began in December and wasn't finished until January.  Do I need two separate depreciation schedules starting in two separate years even though it is one project that didn't have any utility until completion in 2018?  Of course, I will plan to reduce the overall expenditure by my personal use of the property.  

Yes...I know I need an accountant, but I'm not going to be able to get one tonight or even this week, so please spare me that predictable response.

@Nicholas L.

To simply answer your question:

1) You do not have to worry about the depreciation for 2017 since the property will not be placed in service in 2017. You cannot depreciate property until you place it in service. You will place the property in service, once it is ready to be rented. ( rehabbed and advertised) 

2) About which year to capitalize, you capitalize whatever you have spent in 2017, and it flows through your balance sheet as an Asset. You dont actually have to send 1099s to capitalize the cost. (but I would recommend filing it). And you add additional cost spent in 2018 to the same property. Once you are ready to depreciate, you have one asset to depreciate. 

 

Thanks, Ashisha.  That makes sense.  

The property has been in service since 2017.  Since it's a vacation rental, I am able to improve it in between bookings.  I guess the same principle applies, that I will begin depreciating the first payment in 2017 and second payment in 2018.  I was just hoping to not have to wait almost an entire year to begin depreciation benefits on the second large payment.  

@Nicholas L.

As is often the case, we're mixing three separate issues.

1. 1099s. You send a 1099 for the work completed when it is paid. It does not matter what happens tax-wise on your end - whether you deduct it, capitalize it, depreciate it or whatnot. You need to send your contractor one 1099 for 2017, equal to what was paid in 2017. Next year - another 1099 for the remainder.

2. Depreciation. You do not depreciate payments, you depreciate assets - i.e. completed projects. If these were two distinct projects, then you can start depreciating the first one in 2017. If these were simply two installment payments on one project, and it did not finish until 2018 - then you must start depreciation on the full project in 2018, both payments combined.

3. Mixed-use property. You can only depreciate the business portion of these improvements. Will have to apply business use % before figuring out the amounts.

3a. Technically speaking, you only need to issue 1099s for the business portion, but I would not dive that deep into technicalities and issue 1099s for the entire amounts.

Originally posted by @Nicholas L. :

Thanks, Ashisha.  That makes sense.  

The property has been in service since 2017.  Since it's a vacation rental, I am able to improve it in between bookings.  I guess the same principle applies, that I will begin depreciating the first payment in 2017 and second payment in 2018.  I was just hoping to not have to wait almost an entire year to begin depreciation benefits on the second large payment.  

 Sorry, I  thought you have not rented the property out yet. Please refer to @Michael Plaks reply. 

Also, I wanted to make you aware that you can expense certain improvements rather than capitalize it if they are below 2,500. I know you said the improvement was about the structural, but if you have other improvements, they can be expensed or fully depreciated in the first year. Keep that in mind. 

Good luck. 

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