Q: I rent a house using a property manager to select tenants, handle calls for repairs, and to collect rents. I paid the manager $1,332 plus gross receipts tax last year. I have previously paid the same manager in 2019 and 2018. I have never reported this payment on a Form 1099-MISC and I was recently told I should be doing this. Since I am late for 2020 and missed the two prior years I want to be sure this is required.
A: That is a surprisingly challenging question. The answer may depend on how you report other items on your tax return. The basic requirement is simple — you must report payments of $600 or more made in the course of conducting a trade or business.
Payments made to entities such as corporations or LLCs do not need to be reported. The manner in which the property manager operates may then affect the filing requirement.
If the property manager is paid as an individual, the filing requirement then turns on whether you are in a trade or business. If so, you do have a filing requirement. If not you have no need to file the Form 1099-MISC.
The tax law’s definition of a trade or business is not clear. There is a difference between an “investment” and a “business.” The line between the two is often blurry, but the distinction is generally based on level of activity.
A business typically involves more activity than an investment. The IRS has generally treated a single rental property as an investment. Recent tax law changes make investment status favorable for the IRS.
As one example, the 2017 Tax Act added a new 20% deduction for “qualified business income.” If a rental property produces net income this deduction is available only if the rental activity is a business rather than an investment.
Taxpayers often want to report rentals as a business to justify this 20% deduction. IRS has warned that if business status is claimed then Form 1099 filing obligations may also apply.
Therefore, you may avoid filing the 1099 if the payments are to an entity. If to an individual, you may also avoid filing if you report the rental activity as an investment. However, once you take that positon you will need to be consistent for other tax reporting issues.
Q: I read that some companies are paying workers to get the COVID-19 vaccine. Would the workers have to report that as income or has the IRS made an exception for that?
A: A cash payment would be taxable income. However, it is my understanding that most of these employers you reference are giving paid time off to get the vaccination. Paid time off is also taxable but it is a bit different than giving someone a check for the vaccine.
I suppose there are ways that an employer could encourage vaccinations in a tax-favored way. For example, if an employer provides a $25 gift certificate to a restaurant that should qualify as a tax-free fringe under the definition of a “de minimis” fringe.
Q: I did not want a 2020 required minimum distribution (RMD) from my IRA and the custodian assured me that I would not receive one. They nonetheless made a RMD to me in December 2020. I am trying to get them to fix this. Do you know how I can get them to do this?
A: There are procedures in place to fix certain common IRA errors, including excess contributions and failures to take RMDs. I do not know of a procedural rule to fix an unwanted distribution.
I think the simplest way would be for you to return the funds within 60 days. This “rollover” would allow you to avoid 2020 tax on the distribution.
There is a limit of one 60-day rollover each 12-month period, so using this approach will prevent you from doing another rollover for 12 months. If this is not a concern for you then I suggest that you do the rollover. You will not need consent or action by the custodian.
The 2020 distribution will be reported to you but you will be able to show zero as the taxable amount due to the rollover.
James R. Hamill is the Director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at [email protected].