Archive for January, 2012
Real estate can be a great way to both build wealth and shield the money you make from your investment from taxes. Of course the down side is, if you have a tax loss from your real estate investment, you can’t always use those losses especially against income you may receive from your job. You’re even further limited the more money you make and while the passive activity rules are complicated enough and a discussion for another time, one way to ensure your losses are utilized as quickly as possible is to qualify as a real estate professional. By qualifying as a real estate professional, you can usually take your losses in full and in the year you incur them. It’s not always easy to qualify, but there’s three rules that have to be met. As always, this is general information so be sure to talk to your tax adviser so he can opine on your particular situation. We’ll cover the first one here today and the other two in subsequent columns.
The first rule is that you have to spend 750 hours to rental property activities. I know I lead up to this and it’s one of the easier rules to understand, but you also have to be careful because in order to qualify as a rental activity, the average rent term has to be longer then a week. If it’s shorter, then the time doesn’t count. So if you have a short term rental property like a vacation home where you rent it out for six days and have a cleaning day, then you can’t count your time related to that activity.
Keep your eyes open for rule number two in the next couple of days.
The IRS is once again revamping it’s innocent spouse relief rules and they’re looking for some feedback. Earlier this month, the IRS issued a notice that both revises the threshold requirements for requesting equitable relief and revises the factors used by the IRS in evaluating these requests. This is a meaty 25 page document that I haven’t absorbed completely but if you have a specific question on the innocent spouse relief rules, I’d love to discuss them with you.
You should be getting your tax forms in the mail if you haven’t already. The deadline for most forms we’re used to is January 31 so there could be some stragglers but I’ve also heard that some people already had their forms last week. One form you may not recognize is the new Form 1099-K. If you accept credit cards or do a lot of business via a company like paypal, the Form 1099-K may be in your future.
In the IRS’s ongoing effort to have everyone else do their job for them, merchant services and third party payment processors are required to issue Form 1099-K to those they service. If you accept any amount via credit card or use a third party payment processor like Paypal (and you have more then $20,000 in revenue and there are more then 200 transactions), then you should be receiving your forms soon. Both the Schedule C and Schedule E have been changed to accommodate these new forms so be sure if you’re doing your return yourself, that you put everything on the right line. For more information, here’s what the IRS has to say about the new form.
The IRS launched electronic filing for the 2011 tax year today. The IRS is touting that if you efile and have a refund and elect direct deposit, you’ll get your money in about ten days. If you have to pay, you can efile now and pay later (by April 17).
Of course the big problem right now is that most employees don’t have their W-2s yet. Employers have until the end of the month to mail out their forms so you probably have a lot of people chomping at the bit to file but can’t quite yet. Of course this is better then last year when efiling was delayed because Congress took so long to pass their tax reforms.
Here it is, January 15 and we’re about a quarter way through the two month payroll tax cut extension with no word as to whether it’s going to be extended or not. We have a lot of news on the Republican nominee for president and if you head over to C-Span, I’m not seeing much on the schedule other then….primary stuff. President Obama is talking about combining agencies in his latest move but I can’t find anything about extending the payroll tax through the end of the year.
When I searched for “payroll tax cut” on Google News, you can see what I get. There’s a story from Friday where John Boehner talked about circumventing the Tea Party contingent of his party to get the tax cut pushed through and it talks about a new round of talks “in the coming days.” Not sure what that means. There are also a few stories about that make it sound like we should be surprised the mortgage fees went up to pay for two month tax cut (this was part of the deal). Finally, this Washington Times piece talks about how most Congressman won’t even be back from their recess until later in the month and one of the quotes talk about the talks going down to the wire. The House starts back up with the Thursday and the Senate doesn’t return until January 23.
This is a twist on my New Forms series because while Schedule D (the form where you report capital gains) has changed, they’ve also modified Form 1099-B as well as added a new form. First off, just by looking at the new Schedule D, you notice the form has changed quite a bit and there’s several references to a Form 8949. No longer do you report the detail of the your capital gains and losses on Schedule D but you do it on Form 8949 and this information then flows into the more streamlined Schedule D.
And then this all ties into the revised Form 1099-B. Now brokerage firms are required to report cost basis. This is just one more way the IRS is cracking down on things. Before, this information wasn’t reported to the IRS and it was left up to you to compute. Since the IRS isn’t very trusting these days, cost basis is now being reported to the IRS so they can make sure you’re reporting the full extent of your gain. On a good note, since everything is right there on the Form 1099-B, it’ll make filling out the form a little easier because you just drop the appropriate numbers into the right boxes.
First up is Lines I and J. This is the IRS’ trap to get more Form 1099 compliance. Be very careful how you answer these questions because if you have a large amount of expenses like professional fees and repairs, you could be opening yourself up to a notice or having the IRS take a second look at your return.
Also new is line 1a. This is to report income from the new Form 1099-K that reports merchant card and third party payments. If you take credit cards or use paypal, look for your 1099-K and this is where you’ll report that income.
Also new is line 27b. Right now it’s reserved for future use. I’m not sure where they’re going with that one so if someone knows, feel free to leave a comment.
That’s it. These are the first changes to these forms in a while and it gives a pretty good indication of what the IRS is on the lookout for. Their budget is being cut so they’re looking to 1099 compliance to help them out and they’re at least making taxpayers think about the 1099 issue by answering the questions.
Good news for procrastinators out there. With it being Emancipation Day, tax returns won’t be due until Tuesday, April 17, 2012. Throw in the fact that this is also a leap year and it means you have a few extra days to get your tax return done this year. This is particularly cool for preparers and I know those extra days will come in handy.
In case you missed, I went into some of the changes on the new Form 1040, Schedule E. If you’re a renter, you won’t want to miss this.
Extenders is the word on the street over at Congress. With the lame and confusing two month payroll tax extension, Congress has that and a bunch of other things to take a look at preferably sooner rather then later. Here’s the rundown on what has to be decided.
Finally, if you’re a part time or even professional gambler, here’s a decent column on tax rules for gamblers.
I’ll get to how in a second, but this post ties in nicely with yesterday’s piece on Form 1099-MISC. The IRS revamped their Schedule E, that’s attached to your Form 1040 if you have either rental properties or you own an interest in a flow through entity (LLC and S-Corporations are the big two) where you receive a Schedule K-1. Page two is used to report your flow through entity activity and that’s largely unchanged. Page one has new stuff on it and it’s worth examining further.
The first big change is at the very top of the form where they now ask you two questions and both relate to Form 1099 requirements. In the famous words of Admiral Ackbar, “It’s a trap!!” The two questions seem innocent enough but what the IRS is basically trying to do here is make sure you’re meeting the newer (although they’ve always been around, the IRS just seems to be focusing on them) rules that require property owners to issue 1099s. If you operate your rentals under a business structure you probably should have been doing this anyway but now the IRS is on the prowl with regard to this particular issue.
The trap on Schedule E works like this. Say you’re preparing your return in April and you get to your Schedule E. You say to yourself, “I’ve never done 1099-MISC’s before, I’m not going to start this year plus it’s already too late,” so you check “no” to each question. The problem is, you’ve also reported $800 in professional fees, $1,300 in repairs and $2,000 in management fees, odds are some of those went to an LLC or a self-employed individual (you’re still not required to send corporations a 1099, we dodged that bullet when Congress repealed that provision that was in the health care law. So by saying no to those questions AND reporting those deductions, you’ve now increased your chances of hearing from the IRS. So beware and if you’re reading this now, either read up on (yesterday’s post is a quick primer) or talk to your adviser about getting out some 1099’s.
The other change to the schedule is line 3a. The IRS added a line to separately report income reported on the new Form 1099-K. If you take credit card payments or receive money from a third party network such as paypal.com and you exceed the minimums spelled out in the instructions, then you’ll get a Form 1099-K this year. If that 1099-K is for your rental, then that’s the line where you enter that information.
So that’s the new form. If you want more information, you can find the schedule’s instructions here.
For a tax professional, the beginning of year tax season is broken up into stages. The one that not a lot of people know about (especially if they don’t own their business) is that first month of the year. If you do payroll, W-2s have to go out as do 1099s. If you’re small business (or a new CPA who’s never done 1099s before), here are a few tips to make things easier.
The first thing you should have been doing is collecting W-9s. This form has been revised recently and it gives you all the information you need to both determine whether a company should be sent a 1099-MISC as well as all of the information to prepare the 1099-MISC. Anytime you pick up a new vendor, it’s a good idea to get a W-9 from them.
Of course this is the end of the year so if you’ve gone an entire year without collecting 1099-MISC’s, it’s time to do some work. You should reach out to all of your vendors asking them to fill out the form. Some won’t send them back but others will especially the ones you’re still doing business with.
The next step is figuring out how much you paid each vendor. If you’re using something like Quickbooks and you’re using it effectively, then this shouldn’t be a problem. Just print out a report of payments made to each vendor. That’s the one thing you need (the amount paid) that isn’t on the W-9.
As far as preparing the forms, if you have Quickbooks, you can do 1099s within that program (you’ll need to buy forms from Intuit though). I do some 1099s so I’m still using off the shelf forms from OfficeMax. Within the forms package, you can get software that’s easy to use and best of all, if you use it from year to year, you can carry over the information from a prior year so you don’t need to replicate a lot of work.
One last suggestion, do something here. If you haven’t kept up with your 1099s and five of your 50 vendors sent them back, go ahead and send those five a 1099. Doing something is better then doing nothing.