2010 Small Business Act: You Have Been Drafted by the IRS


In the off chance you missed your IRS draft notice I thought I would remind everyone of their new responsibilities. As you know, the United States has run up a huge deficit and spending is no where near under control. In an effort to appear as if steps are being taken to to address the deficit (you will not I did not write "spending") Congress is poised to increase taxes in 2011 by letting the Bush Tax Cuts expire and increase the burned on business and real estate investors.

The current tax law requires businesses to provide information returns, such a 1099s, to each payee that the business has paid $600 or more for the year in their ordinary course of business.  Until now investing in real estate was not considered to be a business. In one of my earlier posts I wrote of an investor who was denied the ability to deduct several real estate related expenses on his 1040 because the IRS considered him an investor and not a "trade or business." Interestingly when it comes to deductions real estate investing is not considered a trade or business; (Note: you must do more than purchase a few rentals) however, when it comes to assisting the IRS in its collection efforts, starting next year it will be for the limited purpose of reporting.

Effective for 2011, the 2010 Small Business Act provides that solely for purposes of filing information returns, a person receiving rental income from real estate will be considered to be engaged in a trade or business of renting property.  Thus, recipients of rental income from real estate generally are subject to the same information reporting requirements as taxpayers engaged in a trade or business. In particular, 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 required to provide an information return (typically Form 1099-MISC) to IRS and to the service provider.

Translation – beginning next year every investor better maintain great records and issue timely 1099s to those with whom they work. Failure to do so will result in substantial penalties.

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  1. Diana Brafford on

    Clint, thanks for the informative post. I had no idea about this and frankly it makes me a little nervous (mostly cause I knew nothing about it). Thanks for the heads up, good post.

  2. Anthony Russell on

    This is ridiculous! There has to be a way that we can fight this. I, for one, am sick and tired of bureaucrats — and the cowards we elect who support them — who enact asinine regulations with no regard for how it affects the constituency of this country.

  3. I’ve heard of this development for a couple of years now, being involved with taxes for a living. To be fair, IRS was planning to do this long before anyone was talking about the deficit. In fact, they have always characterized it, in presentations I’ve seen, as a way to reduce the tax gap. That is, the difference between what’s owed and what’s actually collected. The idea is that by engaging businesses in 3rd party reporting (1099s in this case), businesses that receive the income will be more accurate in reporting their earnings. Another tactic is that credit card companies will be required to report cc transactions to IRS. That starts in 2011 as well.

  4. Well, there is a job creation element in these requirements. More of us will need to hire accounting and bookkeeping help to comply with an ever increasing load of IRC.

  5. Thanks for the heads up Clint! And for those of you who are incensed at this new reporting requirement – just wait. It gets even better. Starting in 2012, due to the Patient Protection and Affordable Care Act of 2010, Form 1099 reporting is expanded still further. It will apply to payments for goods and/or services of $600 or more during the year to any business that you deal with (even large public corporations); it need not be only services of an independent contractor or a service provider to rental property owners. Our government in action!

  6. Pingback: 2010 Small Business Act: You Have Been Drafted by the IRS « Clint Coons Blog

  7. Pingback: Thank you Speaker Pelosi « benhoweBLOG

  8. This seriously shouldn’t surprise any business owners and/or real estate investors. This is just a game we all play, a one with constant rules that continuously change to the agenda of a higher authority. Just play within the rules. With that being said, I do find it difficult to stay up-to-date with the IRS’s regulations and reading posts from Clint helps a lot.

    Clint, you’ve become a voice of clarity for the masses in the real estate investing and small business profession but extending your knowledge over the internet. Thank you.

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