You may be about to experience another encounter with the law of unintended consequences.
The Tax Cuts and Jobs Act gives you a possible 20 percent tax deduction on your rental property income. But that’s only if your rental property is a trade or business, and that comes with its own burdens.
The preamble to the Section 199A final regulations contains the following new sentence:
… taxpayers should consider the appropriateness of treating a rental activity as a trade or business for purposes of section 199A where the taxpayer does not comply with the information return filing requirements under section 6041.
Tax code Section 6041 requires a trade or business to issue 1099s to certain vendors.
So, the IRS is saying that you “should consider the appropriateness” of NOT giving 1099s to vendors if you are asserting that your rental property qualifies as a trade or business for the Section 199A tax deduction.
You have two ways to prove that your rental property or activity is a trade or a business:
- The existing tax law without considering any Section 199A rules
- The newly created IRS safe-harbor method
For the Section 199A tax deduction, whether you issue 1099s is irrelevant once you are inside the safe harbor. This doesn’t mean that the 1099s are irrelevant for all tax law.
What to Do
This is pretty ugly, but you do add credibility to your claim that your rental is a trade or business if you give 1099s to your service providers.
And the big question is whether your rental property produces taxable income. With no taxable income, the rental is useless for the Section 199A tax deduction because that deduction is limited to business income. (If aggregated, the property might produce an overall Section 199A benefit.)