On Sept. 27, 2010, President Obama signed the Small Businesses Jobs Act (H.R. 5297) into law. The act is designed to provide $12 billion in tax relief for small businesses while increasing their access to available credit. But the federal government needs to pay for tax breaks somehow, so it’s also placing a new burden on unsuspecting vacation and rental property owners and their service providers. Basically, the IRS no longer makes a distinction between a vacation rental and a small business for the purposes of reporting expense information, a change that will affect thousands of rental property owners—and the vendors who serve them—in Sarasota and Manatee.
Beginning Jan. 1, 2011, rental property expenses of $600 or more paid to any vendor, within a calendar year, must be filed with the IRS using 2011 Form 1099. To do that, rental property owners will need to have everyone working for them fill out IRS Form W-9 to get the vendor’s name, address and tax ID number. This means that unincorporated individuals who clean, mow the lawn, or unclog the drain in your condo will be held accountable for reporting all of their income to the IRS.
In Sarasota and Manatee, thousands of property owners live in their Florida home for only a few months and try to keep it rented out the other months of the year. Still others have only one or two units they keep as an investment or to help out family members. These owners likely will not know about the new laws or how to file properly, says Cheryl Harrier, a CPA with CPA Associates, who is trying to prepare her clients for the change.
The new law will “generate revenue, but at what cost of hardship on the little guys?” she asks. “It’s going to be ridiculous. I think it will be an accounting nightmare. I don’t see how people will do it.”
Some rental property owners—such as members of the military and some whose rental income is minimal—will be exempt, but the IRS has not yet determined what that minimal amount will be.
Ali Murphy, director of vacation rentals at Argus Property Management in Sarasota, which has more than 250 community associations and 800 rental properties in its portfolio, says the new law won’t affect property managers. “This is a new requirement by the Obama administration,” she says, “but it is a service that we have always provided to our owners.”
Larry Starr, president of ResortQuest Southwest Florida, a ResortQuest affiliate that has 600 vacation rentals under management, doesn’t think the new law will drive more people underground into all-cash transactions or encourage them to hire property managers. “People who do things legally will follow the legislation if they know about it,” he says. “People who don’t report will continue to operate that way. It will only change the behavior of people who get caught.”
And getting caught comes with stiff penalties: A minimum fine for intentionally failing to file a 1099 is increasing from $100 to $250.
“Receiving income from a rental property is now considered a small business,” says Murphy. “Owners will need to have a property management service, a good accountant or keep really good records to avoid penalties.”
What You Need to Know
Owners of vacation rentals and other rental properties should immediately begin strict record keeping. They must give a W-9 form to all vendors. This form should be filled out and returned to the owner before making a payment to the vendor. (Otherwise, it could be very difficult to get the Social Security number from someone who has already been paid for their services.) The owner or his accountant must then issue a 1099 to the IRS and the service provider. Then the 1099 will be used by the service provider to report his or her income and will help the IRS to cross-reference the owners’ deductions for expenses. For more information about how to file and to download forms, visit irs.gov or contact a professional accounting or management service.