If you are leasing a space for your small business, I have two questions for you:
- Did you prepay your 2019 rent so that you have a big 2018 tax deduction?
- How do you identify in your accounting records the monies you put on your IRS Form 1099-MISC for the business rent payments to your landlord?
A golden rule when it comes to your landlord is “do not cause your landlord tax trouble.”
However, if you are simply looking at your checkbook or payment ledgers to identify the amounts you are going to report on your 1099-MISC, you will create an incorrect 1099 for your landlord and cause them just that—tax trouble.
How, you ask?
Let’s say you wrote a $55,000 check to your landlord on December 31 and mailed it that day. They received the check on January 3. Here’s how your Form 1099-MISC can create “tax trouble”:
- Your Form 1099-MISC to the landlord shows rent paid of $105,000 ($50,000 paid during the year and then the $55,000 prepayment on December 31).
- The landlord’s 2018 federal income tax return shows $50,000 in rent received (the remaining $55,000 was received in 2019).
- IRS computers note the difference and start an inquiry.
An incorrect 1099 that overstates the landlord’s income is a problem that can lead to a tax audit.
According to IRS Reg. Section 1.6041-1(f):
The amount to be reported as paid to a payee is the amount includible in the gross income of the payee…
NOTE: As you will see below, this amount does not necessarily equal the tax deduction claimed by the payor.
Reg. Section 1.6041-1(h) says:
For purposes of a return of information, an amount is deemed to have been paid when it is credited or set apart to a person without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made, and is made available to him so that it may be drawn at any time, and its receipt brought within his own control and disposition.
The 1099-MISC is a “return of information.”
The landlord did not have control of the money until he or she had possession of the check in 2019.
In the Cheryl Mayfield Therapy Center case, the court stated:
A “payment” is made for purposes of section 6041 information returns when an amount is made available to a person “so that it may be drawn at any time, and its receipt brought within his own control and disposition.”
It can be surprising that the 1099 could contain a taxable amount to the payee that is different from the deduction amount of the payor.
For example, in the above case, the correct 1099-MISC amount is $50,000. That’s the amount you will need to put on the 1099-MISC you send to the landlord for 2018 even though you are going to deduct $105,000 as a cash-basis taxpayer.
If you have this mismatch and would like to discuss how it can be resolved, call our office at (732) 566-3660.