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.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.