The Sec. 199A deduction has stirred up a lot of controversy in the tax preparation community related to whether landlords are subject to information reporting requirements, typically filing and issuing 1099-MISC forms for annual payments of $600 or more to unincorporated service providers such as plumbers, the pool guy, gardeners, etc. And unfortunately, the government has added substantially to that confusion.
First, you need to understand the background of the information return filing requirement for landlords to understand what currently applies. So, let’s take it from the beginning and keep in mind the key wording here is trade or business. I have bolded and underlined key references to trade or business.
Sec 6041(a) – Requires all persons engaged in a trade or business and making payment in the course of such trade or business to another person of $600 or more during a calendar year to issue information returns.
ACA - Back in 2010 the Patient Protection and Affordable Care Act (ACA) included a provision requiring that solely for purposes of information reporting a person receiving rental income from real estate shall be considered to be engaged in a trade or business of renting property (Effective December 31, 2010).
That raised such an outcry that the American Taxpayer Relief Act of 2012 retroactively repealed that ACA requirement. Here is the Joint Committee on Taxation (JCX-9-11, Pg. 5) explanation of the repeal: “Under the provision, recipients of rental income from real estate who are not otherwise considered to be engaged in a trade or business of renting property are not subject to the same information reporting requirements as taxpayers who are considered to be engaged in a trade or business. As a result, rental income recipients making payments of $600 or more to a service provider (such as a plumber, painter, or accountant) in the course of earning rental income are not required to provide an information return (typically Form 1099-MISC) to the IRS and to the service provider (Effective December 31, 2010).
Additionally, the Joint Committee on Taxation (JCX-47-10 9-16-10 page 27) included a good explanation of the bill before it got repealed: "Additionally, the requirement that businesses report certain payments is not applicable to persons engaged in a passive investment activity. Thus, a taxpayer whose rental real estate activity is a trade or business is subject to this reporting requirement, but a taxpayer whose rental real estate activity is not considered a trade or business is not subject to such requirement."
So, now along comes TCJA and the new 199A deduction that applies to a trade or business. Included in the final 199A regulations is the following under “(e) Taxpayer Consistency” (prologue to final regs page 21) which includes the following caution for taxpayers treating rentals as a trade or business: “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”. In other words, it is not “consistent” for a TP to claim trade or business for section 199A and not for section 6041 Form 1099 reporting.
Summary: Nothing has changed in the law, which has consistently provided that trades or businesses are subject to the Sec 6041(a) information reporting requirements. Thus, if a rental is treated as a trade or business for purposes of the Sec. 199A deduction then the information reporting requirements apply.