Q: I run a property management company. We receive rent on behalf of an owner, pay expenses, and disburse the net to the owner. We do not consider the rental income as (our) income, nor do we deduct the expenses these properties incurred.
We keep our business income and expenses completely separate from the properties we manage. Do we need to send 1099 forms to our owners related to the gross income? Or just the net income? Or does this only apply if the owner is an individual rather than an LLC?
A: You are quite correct that the rental income your company receives, and the expenses it pays, on clients’ behalf, is not your company’s income or expenses. It belongs to the individual property owners who are your clients.
You do not list this as income or expenses on your company’s tax return. The only income you need to report on your own return and pay tax on are the fees and commissions your clients pay you.
However, the Internal Revenue Service wants to know how much you remit to your clients each year. IRS regulations require rental agents and property management companies to file a 1099-MISC information return each year reporting the net amount paid to each client. This rule is intended to help prevent landlords from underreporting their rental income.
In addition, if you pay a repairman or other person $600 or more during the year to perform services for a client’s property, you must separately report those payments to the IRS.
You report these payments on IRS Form 1099-MISC. Subtract your management fees, commissions, maintenance and repair expenses, and other expenses you deducted from the client’s rental payments during the year, and list the net amount in Box 1.
Copies of the 1099 must be given to the client by Jan. 31 of the year after the payments were made, and to the IRS by Feb. 28. You can file this form electronically (if you file 250 or more 1099s each year, you’re required to do so).
There is one important exception to these reporting rules: 1099s need not be filed where the payee is a corporation. Thus, they need be filed if the property owner is a corporation.
The same holds true if you hire an incorporated business, instead of an unincorporated independent contractor, to perform maintenance, repair or other services on a client’s rentals.
This exception applies only to corporations, not to limited liability companies (which are very popular with rental property owners).
Stephen Fishman is a tax expert, attorney and author who has published 18 books, including "Working for Yourself: Law & Taxes for Contractors, Freelancers and Consultants," "Deduct It," "Working as an Independent Contractor," and "Working with Independent Contractors." He welcomes your questions for this weekly column.
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