The New Form 1040, Schedule E
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a self-employed individual (you’re still not required to send corporations a 1099, we dodged that bullet when Congress repealed that provision that was in the health care law.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.