When the federal Small Business Jobs Act (the "Act") was signed into law on September 27, 2010, all attention was focused on the Act's most prominent provisions, which its supporters touted as designed to enhance and promote business investment, lending and entrepreneurship. Unfortunately for many real estate rental property owners, the Act's small print1 reflects a less pleasing reality.
Expanded Information Reporting Requirements
The principal source of the frown on rental real property owners' faces is Section 2101 of the Act, which extends the information reporting requirements of taxpayers engaged in a trade or business to persons receiving rental income from real estate. This means that owners of real property who receive rental income from that property are now, for the first time, required to issue a Form 1099 to each service provider to which the property owner makes a payment of $600 or more during the year. Payment examples subject to the reporting requirement include fees for legal and accounting services, and payments made to contractors providing grounds and building maintenance and repairs.
Expanded Reporting Effective for the 2011 Tax Year
The new reporting requirement applies to payments made after December 31, 2010. Consequently, in anticipation of being able to issue the required 1099 forms beginning in 2012, rental real property owners will need to establish and maintain an appropriate record-keeping system for all payments made on or after January 1, 2011. As part of this process, a rental real property owner will need to collect the name, address and taxpayer identification number of each affected service provider, typically by requiring the service provider to provide a completed and signed Form W-9.
An exception to the reporting requirement exists for "an individual who receives rental income of not more than the minimal amount, as determined under regulations prescribed by the Secretary [of the Treasury]." Applicable regulations have not yet been issued and, based on the language of the Act, this "minimal amount" exception applies only to an "individual" payer, not to an entity making a payment.
In addition to extending the reporting obligation to rental real property owners, the Act significantly increases the penalties for failure to file correct informational returns, with penalty levels now as high as $500,000. Also, a previously effective provision that exempted payments to corporations from the information reporting requirement has been eliminated, unless the corporation to whom payment is made is a nonprofit corporation.