Surprisingly, until recently, it has never been clear. Some people believed landlords didn't have to file 1099s at all, or needed to file them only if they wanted to qualify as real estate professionals for purposes of the passive loss rules. However, the IRS has recently made it clear that all landlords should file Form 1099-NEC.
The reason a landlord should file Form 1099-NEC is to help the rental activity qualify as a business for tax purposes, instead of an investment activity.
By filing Form 1099-NEC, you can qualify for several important tax benefits that are only available to businesses. For example, you might qualify for:
Additionally, when your rental activity qualifies as a business, you get the best possible tax treatment when you sell your rental property. Any gains are treated as capital gains, which are subject to a lower tax rate than ordinary income.
If you sell the property at a loss, you may deduct the loss without limit against all your income. Such losses are limited to $3,000 per year if your rental activity qualifies as an investment activity, not a business.
One of the most significant changes the Tax Cuts and Jobs Act brought about was the creation of a brand new tax deduction for pass-through businesses. Pass-through business owners who qualify may deduct up to 20% of their net business income from their income taxes during 2018 through 2025. Landlords whose rental activity qualifies as a business may take the pass-through deduction.
In its final regulations on the pass-through deduction, the IRS discusses how to determine if a rental activity qualifies as a business. It says that:
“taxpayers should consider the appropriateness of treating a rental activity as a trade or business…where the taxpayer does not comply with the information return filing requirements."
Information returns means filing Form 1099-NEC. In other words, it might not be appropriate to treat a rental activity as a business if a landlord doesn't file all required Forms 1099-NEC.
This is something the IRS has never said before. So now we know: Landlords should be filing 1099s. Failure to do so is a mark against you if the IRS ever questions whether your rental activity is a business.
Fortunately, filing Form 1099-NEC isn't an onerous requirement. The basic rule is that you must file a 1099-NEC form with the IRS if you pay an unincorporated independent contractor $600 or more during a year for rental-related services.
It makes no difference whether the sum was one payment for a single job or the total of many small payments for multiple jobs. This includes payments to property managers, repair people, and anyone else who performs services for your rental and is not your employee.
In calculating whether the payments made to an independent contractor total $600 or more during a year, you must include payments you make for parts
 or materials the independent contractor used in performing the services. For example, if
 you hire an electrician to rewire a rental building and he charges you separately for the electrical wiring and other materials he installs, the cost must be included in the tally.
You need to file Form 1099-NEC only if you pay an independent contractor $600 or more by cash, check, or direct deposit during the year.
If you pay an independent contractor by an online payment service like PayPal, credit card, or any other type of electronic payment, you don’t need to file a Form 1099-NEC reporting the payment to the IRS. PayPal or the other payment service may have to report the payment; but this isn't your problem.
All 1099-NEC forms reporting payments to independent contractors must be filed with the IRS by January 31. This is so whether they are filed electronically or on paper. The independent contractor must also be provided a copy no later than January 31. Most states use the same filing deadline.
If you file fewer than 250 1099-NEC forms during the year, you have the option of filing them on paper or e-filing them. (The IRS prefers that you file electronically.)
Filing Form 1099-NEC on paper. To file on paper, you must obtain original 1099-MISC forms from the IRS for filing. You can’t photocopy this form because it contains several pressure-sensitive copies. To order the forms from the IRS, go to the IRS website. You can also use tax preparation or accounting software to prepare your 1099-NECs. Fillable PDFs of Copies B, C, 1, and 2 of Form 1099-NEC are available at IRS.gov/Form1099NEC. You can complete these copies online for furnishing statements to recipients and for retaining in your own files; but you can’t file them with the IRS. Alternatively, there are inexpensive online services that will complete and file the forms for you, such as efilemyforms.com, efile4biz.com, and efile1099now.com.
All your 1099-NEC forms must be submitted together along with one copy of Form 1096, which is a transmittal form. You must obtain an original Form 1096 from the IRS; you cannot submit a photocopy.
Filing Form 1099-NEC electronically. If you want to file electronically, you have three options:
For information about tax deductions for landlords and tax tips in general, get Every Landlord's Tax Deduction Guide, by Stephen Fishman (Nolo).
If you need more help, talk to a tax professional, such as a certified public accountant or a tax attorney. A tax professional can prepare tax returns or provide tax information, guidance, or representation before the IRS.
]]>Ministers, have a unique tax status. For purposes of Social Security and Medicare taxes, ministers are considered to be self-employed and these taxes aren't withheld from their pay. For federal income tax purposes they may either be self-employed or employees of the church or other religious institution.
It's up to the minister and church to determine how the minister should be classified for income tax purposes, although this determination is subject to IRS review. The classification depends on how much control the church exercises over the minister.
If the church has the right to direct and control the way the minister performs their duties—both as to the final results and the details of when, where, and how the work is done—then the minister is an employee. On the other hand, if the church's control is limited to accepting or rejecting the final results the minister achieves, then they are an independent contractor. Most ministers are classified as employees for income tax purposes.
As a result of the Tax Cuts and Jobs Act (TCJA), ministers are better off tax-wise if they are classified as self-employed independent contractors, not employees. A minister who is classified as self-employed may deduct all of their work-related expenses in full on IRS Schedule C.
However, as a result of the TCJA, ministers classified as employees may deduct none of their unreimbursed expenses. The TCJA eliminated all deductions for unreimbursed employee expenses for 2018 through 2025. Before this change, these expenses were deductible as a miscellaneous itemized deduction on Form 1040 Schedule A. Employee ministers should seek to have their work-related expenses reimbursed by their church. Such reimbursements are tax-free so long as the expenses are properly documented.
Common deductions for self-employed ministers include the following.
Deductible transportation costs may include trips for hospital and nursing home visits or for other church business. However, trips between a minister’s personal residence and the church are considered nondeductible commuting expenses unless the minister has a tax deductible home office. Ministers may deduct trips by car or public transportation.
There are two methods to keep track of car expenses: recording all car expenses including how much is spent for gas, oil, repairs, car washes, and so forth, or using the standard mileage rate. With the standard rate, the minister need only keep track of how many miles he or she drives for church business.
A minister may incur travel away from home occasionally for special conferences or other duties out of the area. The same rules regarding the deductibility of meals and lodging apply as for other taxpayers. These expenses include airfare or other transportation costs and hotel or other lodging expenses.
But, only 50% of the cost of meals when travelling on church business may be deducted.
Ministers may deduct out-of-pocket costs for office supplies.
Minsters may also deduct the cost of job-related books and periodicals for which they are not reimbursed.
Ministers often pay a small annual renewal fee to maintain their credentials—this is a deductible expense. However, ministers' contributions to the church are not deductible as business expenses. These are deductible only as charitable contributions, not business expenses. The difference is that charitable contributions are a personal itemized deduction, while business deductions are directly deductible on Form 1040 without itemizing.
Ministers may deduct the cost for special vestments—these qualify as uniforms for tax purposes. The cost of care and cleaning of vestments is also deductible.
If a self-employed minister's compensation includes a parsonage or housing allowance which is exempt from income tax, the prorated portion of the expenses allocable to the tax exempt income is not deductible. For example, if the tax exempt housing allowance amounts to 25% of a minister's total compensation, 25% of his or her expenses would not be deductible. The remaining 75% expenses would be deductible on Schedule C.
If you need tax help, talk to a tax professional, such as a certified public accountant or a tax attorney. A tax professional can prepare tax returns, give tax information and guidance, as well as provide representation before the IRS.
For example, if you're in the 22% tax bracket, each $100 in deductions saves you $22 in income tax. It will also usually save you about $15 in self-employment taxes as well.
Professional artists are usually independent contractors, not employees. A self-employed artist may deduct any expense that is:
Common deductions by artists include the following.
Artists often travel out of town, or even out of the country, to work or show their art. You may deduct all reasonable expenses you incur when doing so. These expenses include airfare or other transportation costs and hotel or other lodging expenses.
But, you may only deduct 50% of the cost of meals when you travel for your art business. If you plan things right, you can even mix pleasure and business and still get a deduction.
Local travel may include trips to galleries, art classes, or to pick up supplies. You may deduct trips by car or public transportation. If you like recordkeeping, you can keep track of all your car expenses to figure out your annual deduction.
But if you’d rather not keep track of how much you spend for gas, oil, repairs, car washes, and so forth, you can use the standard mileage rate. When you use the standard rate, you only need to keep track of how many miles you drive for business, not how much you spend on your car.
If you have an agent, you may deduct all the fees they charge.
If you have an art studio in your home you use exclusively for your art business, you might be able to deduct the cost using the home office deduction.
This deduction is particularly valuable if you are a renter because it enables you to deduct a portion of your monthly rent, a sizeable expense that is ordinarily not deductible. The rent and utilities paid for an outside studio are fully deductible business expenses.
Art gallery rents or membership costs are fully deductible.
Professional artists often purchase tangible personal property that lasts for more than one year, such as computers, presses, cameras and video equipment, welding equipment, cell phones, and art books. The cost of such property can usually be deducted using bonus depreciation, Section 179 expensing, regular depreciation, or the de minimis safe harbor (applicable to property that costs $2,500 or less).
Supplies are items you purchase for your art business that you use up in less than one year. Of course, these include all your studio supplies. They also include things like stationery and postage.
A professional artist is in the business of selling art. The artwork is inventory, just like a bookstore's books are inventory.
You deduct the cost of creating your artwork—such as the cost of canvas, paints, and frames—only for the artwork you sell during the year. These expenses are part of an artist's "cost of goods sold." Any remaining unsold artwork is inventory whose cost can't be deducted.
Dues you pay to belong to professional artist societies or other organizations for artists are deductible.
Fees to enter juried shows are deductible.
Art classes and lessons are deductible.
Virtually everything you spend money on to promote yourself as an artist is deductible, including advertising and listings in art publications, photos, brochures, videos, and websites (including internet connection costs).
You can deduct the cost of art magazines, journals, newsletters, and other subscriptions useful for your art business.
You can deduct fees you pay to attorneys, accountants, consultants, and other professionals if the fees are paid for work related to your art business.
Self-employed people, including artists, are also allowed to deduct 100% of their health insurance premiums from their income taxes. In addition, If you have a home office, you may deduct a portion of your homeowner's insurance.
To deduct the cost of a meal in a restaurant, you must have a serious business discussion before, during, or soon after the event. Moreover, you may only deduct 50% of your business meal as costs.
So, for example, you can deduct 50% of the cost of a meal you have with a gallery owner to discuss displaying your work. As of 2018, you may not deduct entertainment expenses—for example, treating an art critic to theater tickets.
The vast majority of professional artists operate as pass-through businesses. A "pass-through" business is any business in which the profits are taxed on the owner’s individual tax return at his or her individual tax rates. Most artists are sole proprietors (a one-owner business in which the owner personally owns all the business assets); a few have formed limited liability companies, S corporations, or are members of partnerships. All such artists are operating pass-through businesses.
The Tax Cuts and Jobs Act established a brand new deduction that allows owners of pass-through businesses, including artists, to deduct an amount equal to up to 20% of their net income from the business. This deduction is in addition to all their other art business deductions. The pass-through deduction is a personal deduction pass-through owners can take on their returns whether or not they itemize. For example, if you earn $50,000 in profit from your art business and qualify for the pass-through deduction, you may deduct $10,000.
However, you’re entitled to the full 20% pass-through deduction only if your taxable income from all sources after deductions is less than a certain limit, which changes annually. The deduction is phased out if your income exceeds the limit.
This deduction began on January 1, 2018 and is scheduled to last through December 31, 2025.
If you need tax help, talk to a tax professional, such as a certified public accountant or a tax attorney. A tax professional can prepare tax returns or provide tax information, guidance, or representation before the IRS.
Tax deductions are quite valuable—for example, if you're in the 22% tax bracket, each $100 in deductions saves you $22 in income tax. It will also usually save you about $15 in self-employment taxes as well.
Here are some common tax deductions writers take.
If, like most writers, you work at home, you may be able to deduct the cost of your home office. This deduction is particularly valuable if you are a renter because it enables you to deduct a portion of your monthly rent, a sizable expense that is ordinarily not deductible. If you rent an outside office, the entire cost is deductible.
You may deduct the cost of long-term property you buy for your writing business that will last more than one year, such as a computer, cell phone, and office furniture. Such property can usually be deducted using bonus depreciation, Section 179 expensing, regular depreciation, or the de minimis safe harbor (applicable to property that costs $2,500 or less).
Supplies are business items that you use up in less than one year. They include everything from paperclips to postage stamps. They can all be deducted the year you buy them.
You can deduct the cost of subscribing to on-line and print publications useful for your writing business. These include magazines, journals, newsletters, and blogs. This would also include, for example, the cost of any magazine to which you may wish to sell a freelance article.
Professional writers may deduct their research expenses such as the cost of books or hiring a researcher.
You can deduct fees that you pay to attorneys, accountants, consultants, and other professionals if the fees are paid for work related to your business.
Self-employed people, including writers, are also allowed to deduct 100% of their health insurance premiums from their income taxes. But this deduction is limited to the annual profit you earn from your business. In addition, If you have a home office, you may deduct a portion of your homeowner's insurance.
If, like most writers, you use the internet for research and marketing purposes, you may deduct the business portion of your internet connection fees.
You can deduct the cost of designing and maintaining a website you use to promote your writing business. You can also deduct your Internet hosting fees and the cost of obtaining a domain name.
If you hire people to help with your writing business, you may deduct the cost as a business expense. For example, you could deduct the cost of hiring an editor to edit your work or a proofreader to proofread it.
If you have a literary agent, you may deduct all the fees that person charges.
You may also deduct your expenses when you go out of town for your writing business—for example, to attend a writing-related conference or workshop, conduct an author's tour, or do research or interviews for a specific article or book. These expenses include airfare or other transportation costs and hotel or other lodging expenses.
But, you may only deduct 50% of the cost of meals when you travel for your writing business. If you plan things right, you can even mix pleasure and business and still get a deduction.
The days of the deductible three-martini lunch are pretty much at an end. But you may deduct 50% of the cost of meals that are business-related. You must be present at the meal and it must be furnished to current or potential business associates or contacts.
The IRS doesn't require you get a specific business benefit to take this deduction. Starting in 2018, you may not deduct entertainment expenses—for example, treating a publisher or agent to a baseball game or the theater.
You get no deduction for the monthly charges for a single phone in your home, whether a land line or cell phone; but you may deduct extra costs for long distance phone calls and special phone services you use for your sales business such as call waiting or message center. You may deduct the full cost of a second phone you use for business, including a cell phone. If you use a second phone both for personal and business calls, you’re required to document your business use.
Local travel may include trips to your publisher, to pick up office supplies, or driving to libraries and bookstores. You may deduct trips by car or public transportation. If you like recordkeeping, you can keep track of all your car expenses to figure your annual deduction.
But, if you’d rather not keep track of how much you spend for gas, oil, repairs, car washes, and so forth, you can use the standard mileage rate. When you use the standard rate, you only need to keep track of how many miles you drive for business, not how much you spend on your car. If you elect to use the standard rate, your annual depreciation deduction is limited (check the IRS website for the amount).
Virtually all professional writers operate as pass-through businesses—that is, the business is operated as a:
The Tax Cuts and Jobs Act created a new deduction for owners of such pass-through businesses: They may deduct an amount up to 20% of their net income from the business. This is in addition to all their other business deductions.
The pass-through deduction is a personal deduction pass-through owners can take on their returns whether or not they itemize. This deduction began on January 1, 2018 and is scheduled to last through December 31, 2025.
If you need tax help, talk to a tax professional, such as a certified public accountant or a tax attorney. A tax professional can prepare tax returns or provide tax information, guidance, or representation before the IRS.
As a result, many actors, particularly those classified as employees instead of independent contractors, will end up paying more tax.
Typical deductible expenses for actors include, but are not limited to, the following:
All of these expenses can really add up for professional actors, easily equaling 20% to 35% of acting income.
Prior to the enactment of the TCJA, any ordinary and necessary expenses that actors paid out of their own pockets that were directly related to their acting activity were deductible.
If you were an employee-actor, you deducted the expense as an unreimbursed employee expense. Independent contractors deducted the costs as a business expense.
Unfortunately, the ability of actors classified as employees to deduct their ordinary and necessary job-related expenses (listed above) is strictly limited under the TCJA. Prior to 2018, employee-actors were permitted to deduct their unreimbursed acting expenses as an itemized personal deduction on IRS Schedule A.
These business-related expenses were deductible only if, and to the extent, they exceeded 2% of the employee’s adjusted gross income (AGI). For example, an actor whose AGI was $100,000 and had $20,000 in unreimbursed expenses could deduct $18,000 (2% of $100,000 = $2,000).
The TCJA completely eliminates the deduction for unreimbursed employee expenses for 2018 through 2025. This means, for example, that an employee-actor who spends $20,000 out of their own pocket on business-related expenses during 2018 through 2025 will not be able to deduct the expense.
As a result, professional actors with substantial unreimbursed expenses will end up paying more income tax. Actor’s Equity says that some working actors could see their taxes almost quadruple. Actors may seek pay increases to pay the extra tax, or have some of their expenses reimbursed.
This change under the TCJA regarding the deductibility of unreimbursed employee expenses will impact the many actors classified as employees. Professional actors in the United States are ordinarily members of one or more entertainment unions: Actor’s Equity, American Federation of Television and Radio Artists, and the Screen Actors Guild.
When producers hire professional actors to do work these unions’ collective bargaining agreements cover, they're ordinarily required to be classified as employees for tax and other purposes. The producer issues them IRS Form W-2 and the producer withholds their taxes from their pay. The producer must also pay half the Social Security and Medicare tax due on their wages.
Actors who are classified as independent contractors instead of employees aren't subject to the limitations discussed above regarding unreimbursed employee expenses. Their expenses are fully deductible business expenses and there is no 2% of AGI limit.
These expenses aren't affected by the TCJA’s elimination of the deduction for unreimbursed employee expenses because they are business expenses, not employee expenses. The TCJA places no new limits on the deductibility of business expenses (except for certain entertainment expenses).
The tax law takes pity on actors who earn little money by providing them with a special “qualified performing artist deduction.” The deduction is unaffected by the TCJA.
However, you qualify for it only if your adjusted gross income (AGI) from all sources, not just acting, is $16,000 or less (including income your spouse earns). If your AGI is this small, you qualify for the deduction if:
If you meet these requirements, you may deduct all of your performing expenses as an “above the line” deduction without itemizing and not subject to the 2% of AGI threshold. Few actors earn less than $16,000. Most who earn less than this from acting have other jobs, or a spouse who earns income.
Highly successful professional actors often form personal service corporations, referred to as “loan-out corporations” in entertainment industry parlance. Instead of hiring the actor individually, a producer contracts with the actor’s corporation and pays the corporation, not the actor. The actor is an employee of their corporation.
In this arrangement, the corporation is entitled to deduct all of the actor’s unreimbursed expenses as a business expense. Thus, the limitations on deductions discussed above don’t apply. Due to the expense and complexities involved, however, an actor must earn enough to make this economically feasible.
If you need tax help, talk to a tax professional, such as a certified public accountant or a tax attorney. A tax professional can prepare tax returns, give tax information and guidance, as well as provide representation before the IRS.
If you qualify, you may be able to deduct up to 20% of your net rental income from your income taxes. This deduction began in 2018 and is scheduled to last through 2025.
Landlords have been among the biggest winners under the TCJA.
For landlords, the most stunningly good provision of the TCJA was a new tax deduction for owners of pass-through businesses. This includes the vast majority of residential landlords who own their rental property as sole proprietors (who individually own their properties), limited liability companies (LLCs), and partnerships. With these entities, any profit earned from the rental activity is “passed through” to the owner or owners’ individual tax returns, and they pay tax on it at their individual income tax rates.
Example. Alex, a single person, owns a duplex she rents out. She earns a total profit of $20,000. Alex is a sole proprietor. She reports her rental income and expenses on IRS Schedule E. She adds her $20,000 rental profit to her other income and pays tax on it at her individual tax rates. Her top tax rate is 24%, so she pays $4,800 in income tax on her rental profit.
The TCJA created a new tax deduction for individuals who earn income through pass-through entities. (IRC Sec. 199A.) If your rental activity qualifies as a business for tax purposes, as most do, you might be eligible to deduct an amount equal to 20% of your net rental income.
This deduction is in addition to all your other rental-related deductions. If you qualify for this deduction, you’ll effectively be taxed on only 80% of your rental income.
You qualify for an income tax deduction equal to 20% of your rental income if:
Example. Assume that Alex from the above example had $100,000 in taxable income in 2023. Because she was a sole proprietor, she may take a pass-through income deduction of 20% x $20,000 rental income = $4,000. As a result, she saves $960 in income tax.
This deduction is subject to some limitations if your income exceeds the limits above.
This deduction is a personal deduction you can take on your return whether or not you itemize. But it isn’t an “above the line” deduction that reduces your adjusted gross income (AGI).
If your 2023 annual taxable income is over $232,100 if you’re single or $464,200 if you’re married filing jointly, you are still entitled to a pass-through deduction of up to 20% of your rental activity income. However, your deduction can't exceed:
Because most residential landlords have no employees, the 25% plus 2.5% deduction will be of most benefit to them.
Example. Assume that Alex, from the above examples, earned $250,000 in total taxable income during 2023. She has no employees in her rental business. So, her pass-through deduction is limited to 2.5% of the purchase price of the long-term property she uses in her rental activity. This consists of her duplex, which she purchased five years ago. Her depreciable basis in the duplex (purchase price minus value of the land) is $100,000. Her pass-through deduction is limited to 2.5% x $100,000 = $2,500.
The 2.5% deduction can be taken during the entire depreciation period for the property, which is 27.5 years for residential property. But it can be no shorter than 10 years.
Unfortunately, this deduction can be complex. To qualify for the deduction, you must:
There is one more requirement that could prove a stumbling block for some smaller landlords: To claim the pass-through deduction, your rental activity must constitute a business for tax purposes, not an investment activity.
Surprisingly, neither the IRS nor courts have ever provided any detailed rules on when a rental activity is a business. Now, the IRS has provided some additional guidance and a special safe harbor rule that can help many landlords.
Not every activity that earns money is a business for tax purposes. For any activity to be a business, you must engage in it regularly and continuously, primarily to earn a profit. A “sporadic” activity doesn’t qualify.
Virtually all landlords are trying to make a profit. However, by itself this isn’t enough for a rental activity to be a business. You must work at it regularly and continuously.
How much time must you put in for your rental activity to be a business? This amount has never been clearly defined by the IRS or courts. It is clear, however, that you don’t have to work full-time at it. Moreover, you don’t have to do all the work yourself. You can hire a manager or others to help you and still qualify as a business.
Landlords who own many rental units are almost certainly in business. However, questions can arise where a landlord owns only a few units or only a single rental unit. For this reason, many tax professionals have been uncertain whether small landlords can claim the pass-through deduction. To help alleviate the uncertainty, the IRS has created a special safe harbor rule.
A “safe harbor” rule keeps taxpayers safe from the IRS. If you follow the rule, the IRS won’t bother you. The IRS is enacting a safe harbor rule for landlords solely for purposes of the pass-through deduction. If you follow the rule, the IRS will assume your rental activity is a business for purposes of the pass-through deduction—but for no other purpose.
You must satisfy three requirements to use the safe harbor:
If you have more than one residential rental property, you can combine them together for purposes of these requirements. However, you can’t combine residential with commercial properties.
You can’t use this safe harbor if you live in the property more than 14 days during the year or more than 10% of the number the days during the year the property is rented.
Real estate rented or leased under a triple net lease is also not eligible for this safe harbor. Triple net leases require the tenant to pay for maintenance and insurance as well as rent. They are seldom used for residential real estate.
The 250-hour rental services requirement applies year-by-year for 2018 through 2022. For 2023 and later, you satisfy the requirement if 250 or more hours of services are performed in any three of five consecutive years ending with the current year. Real estate rental services include the following:
Such services don’t all have to be performed by you, the property owner. They may also be performed by your employees, agents, or independent contractors. For example, if you hire a real estate management company, the time they spend managing your property counts toward the 250-hour requirement.
The following types of activities do not count toward the 250 hours:
Starting in 2019, you must maintain contemporaneous time reports, logs, or other records, showing:
You don’t need to file these records with your tax return. Keep them available for inspection at the IRS’s request.
Because rental services performed by managers, agents, employees, and independent contractors count toward the 250-hour requirement, you should ask such workers to keep track of the time they work on your rentals.
This records requirement doesn’t apply for the 2018 tax year because the safe harbor wasn’t created by the IRS until 2019.
The rental pass-through deduction safe harbor is purely optional. You don’t have to use it if you don’t want to. Moreover, failure to satisfy its requirements doesn’t mean your rental activity isn’t a business. For example, you don’t have to assume your rentals are not a business if you spend only 200 hours performing rental services during the year.
The safe harbor was created as a matter of convenience and to help tax professionals process the complex pass-through deduction. It doesn’t establish absolute rules for how much work you must do for your rental activity to constitute a business for purposes of the deduction.
Whether any rental activity is a business is determined on a case-by-case basis based on the particular facts involved. Both the IRS and courts have found that ownership of even one rental property can constitute a business for tax purposes. However, the IRS and courts have also said that renting a single property (or more) doesn’t always constitute a business—it all depends on the facts and circumstances, including the day-to-day involvement of the owner or its agent.
Find out about IRS audit rates and the odds of being audited in What Are the Triggers of IRS Tax Audits?
Learn how much time most people spend doing business taxes.
Get information about common tax deductions for individuals.
For more information on this and other tax issues affecting landlords, refer to Nolo's Every Landlord's Tax Deduction Guide, by Stephen Fishman (Nolo).
If you need more help, talk to a tax professional, such as a certified public accountant or a tax attorney. A tax professional can prepare tax returns or provide tax information, guidance, or representation before the IRS.
]]>The TCJA created a brand new tax deduction for individuals who earn income from businesses owned individually or by pass-through entities like limited liability companies or partnerships, which includes almost all short-term rental hosts. If your short-term rental activity qualifies as a business for tax purposes, as most do, you may be eligible to deduct up to 20% of your net rental income from your income taxes. This is in addition to all your other rental-related deductions.
You need not spend any additional money or buy any new property to qualify for this deduction. How much you’ll be able to deduct, however, depends on your taxable income and how much you earn from your rental activity. For higher-income taxpayers, the deduction is limited to 2.5% of the cost of their rental property plus 25% of amounts paid to employees (which for short-term hosts is usually zero).
When you buy personal property like new furniture or appliances for your rental activity, you get to write off all or part of the cost as a rental expense. The TCJA makes this easier than ever before. During 2018 through 2022, hosts will be able to use 100% bonus depreciation to write off in a single year the full cost of long-term personal property they use for their rental business. Bonus depreciation may now be used for both new and used personal property. It may not be used for real property.
Hosts can also use a provision of the tax code called Section 179 to deduct in one year up to $1 million of personal property purchased for rental units. However, Section 179 may be used only for property that is used over 50% of the time for the rental activity, which limits its use by many short-term hosts who live in their property a majority of the time.
The TCJA limits the personal mortgage interest deduction to interest on $750,000 of acquisition indebtedness, a reduction of $250,000 from prior law, which permitted interest to be deducted on up to $1 million. The itemized personal deduction for real property taxes is limited to a maximum of $10,000. Under prior law, there was no limit on this deduction. The limits on the personal itemized deductions for home mortgage interest and property taxes do not apply to rental businesses. Thus, the portion of a rental host’s mortgage interest and property tax allocated to the short-term rental activity don’t come within the limits. These are rental deductions, not personal itemized deductions.
Operating an activity classified as a hobby for tax purposes has always been a tax disaster; under the TCJA, it is now a tax apocalypse. Under prior law, expenses from a hobby could be deducted as a personal itemized deduction on IRS Schedule A to the extent they exceeded 2% of the taxpayers adjusted gross income. However, these deductible hobby expenses could not exceed hobby income. The TCJA completely removes the personal deduction for hobby expenses. This means that while the income from a rental activity classified as a hobby must be reported and tax paid, no expenses may be deducted.
The vast majority of rental activities qualify as businesses or investment activities. However, rentals that are not profit-motivated must be classified as not-for-profit activities or hobbies.
Almost all short-term hosts pay income tax on their rental profits at their individual tax rates. The TCJA reduced individual income tax rates for almost all taxpayers. So you’ll pay less tax on your profits in 2018 and later.
For more details on taxes for short-term rental hosts, refer to Tax Guide for Short-Term Rentals: Airbnb, HomeAway, VRBO and More, by Stephen Fishman (Nolo).
]]>For example, if you buy a $2,000 computer and use it 100% for your consulting business, you could deduct the full cost from your taxes. If you were in the 24% federal income tax bracket, this would save you $480 in income tax. In effect, you’d be getting a 24% discount on the computer. The catch is you must use the computer or other item you buy for the business. You can’t deduct personal expenses.
The most important tax deductions for self-employed consultants include the following.
The vast majority of consultants operate as pass-through businesses. A "pass-through" business is any business in which the profits are taxed on the owner’s individual tax return at their individual tax rates. Most consultants are sole proprietors (a one-owner business in which the owner personally owns all the business assets), but some have formed limited liability companies, S corporations, or are members of partnerships.
The Tax Cuts and Jobs Act established a brand new deduction that allows owners of such pass-through businesses, including consultants, to deduct an amount equal to up to 20% of their net income from the business. For example, if you earn $100,000 in profit from your consulting business and qualify for the pass-through deduction, you may deduct $20,000.
However, you're entitled to the full 20% pass-through deduction only if your taxable income from all sources after deductions is less than a certain limit, which changes annually. The deduction is phased out if your income exceeds the limit.
This deduction began on January 1, 2018 and is scheduled to last through December 31, 2025.
The cost of all driving you do for your consulting business, with the important exception of commuting, is tax deductible. Nondeductible commuting occurs when you drive from your home to a place of business. So, driving from your home to meet with a client would be nondeductible commuting. However, if you have a home office, you can convert such trips into deductible business trips.
If you like record keeping, you can keep track of all your car expenses to figure out your annual deduction. But, if you’d rather not keep track of how much you spend for gas, oil, repairs, car washes, and so forth, you can use the standard mileage rate. When you use the standard rate, you only need to keep track of how many miles you drive for business, not how much you spend on your car.
The amounts you spend on your business office are deductible business expenses. For example, you may deduct the rent and utilities you spend for an office. If you work at home, you might be able to deduct the cost of your home office. This deduction is particularly valuable if you are a renter because it enables you to deduct a portion of your monthly rent, a sizable expense that is ordinarily not deductible.
You might also be able to deduct your expenses when you go out of town for your consulting business. These include airfare or other transportation costs and hotel or other lodging expenses.
But, you may only deduct 50% of the cost of meals when you travel on business. If you plan things right, you can even mix pleasure and business and still get a deduction.
You can deduct the cost of magazines, journals, newsletters, and other subscriptions useful for your consulting business.
Consultants often purchase tangible personal property that lasts for more than one year, such as computers, office furniture, and business-related books. The full cost of such property can usually be deducted using bonus depreciation, Section 179 expensing, regular depreciation, or the de minimis safe harbor (applicable to property that costs $2,500 or less).
Supplies are business items that you use up in less than one year. They include everything from paper clips to postage stamps. All of these items used for your business are deductible.
You can deduct fees you pay to attorneys, accountants, consultants, and other professionals if the fees are paid for work related to your consulting business.
Insurance you buy just for your business is deductible, including business liability insurance or insurance for business property. If you have a home office, you may deduct a portion of your homeowner's insurance. Self-employed people are also allowed to deduct 100% of their health insurance premiums from their income taxes.
Just about everything you spend to help promote yourself and your consulting business is a deductible business expense. This includes the cost of designing and maintaining a website you use for consulting business, internet hosting fees, the cost of obtaining a domain name for your business, brochures, resume costs, listings in professional directories, and similar items.
Gifts you purchase for clients are deductible as a business expense, but the deduction is limited to $25 per person per year. However, the $25 limit applies only to gifts to individuals. It doesn’t apply if you give a gift to an entire company, unless the gift was intended for a particular person or group of people within the company. Such company-wide gifts are deductible in any amount as long as it is reasonable.
You get no deduction for the monthly charges for a single phone in your home, whether a landline or cell phone. But you may deduct extra costs for long-distance phone calls and special phone services you use for business, such as call waiting or message center.
You may deduct the full cost of a second phone you use for business, including a cell phone. If you use a second phone both for personal and business calls, you’re required to document your business use.
If you need tax help, talk to a tax professional, such as a certified public accountant or a tax attorney. A tax professional can prepare tax returns, give tax information and guidance, as well as provide representation before the IRS.
What’s the one thing most golfers like as much as playing golf? Saving money on their taxes. Sometimes it’s possible to combine the two.
You may never deduct country club dues or the cost to play a round of golf for fun. However, if you have a business, you might be able to deduct golf-related expenses as a business entertainment expense.
To qualify for this deduction, you must discuss business with one or more people before or after you play golf--for example, you have a meal or drink with one or more business associates at the clubhouse before or after you golf together. Discussions you have while you play golf don't qualify for the deduction. Ordinarily, the business discussion should occur on the same day as the golf. However, if the people you play golf with are coming from out of town and have to stay overnight, the golf can occur on the day before or day after the discussion.
Your discussion must be “associated” with your business—that is, it must have a clear business purpose, such as developing new business or encouraging existing business relationships. You don’t, however, have to expect to get a specific business benefit from the discussion. Your business discussion can involve planning, advice, or simply exchanging useful information with a business associate.
If you qualify for the deduction, you may deduct 50% of your costs for meals, drinks, parking, greens fees, travel to and from the golf course, golf club rental, golf balls, and other similar expenses.
Example: Jack, the owner of a chain of dry cleaners, is a member of the Golden Bear Golf Club in Columbus, Ohio. Jack invites Arnie, a competitor, to play golf at his club. Before the golf, the two have lunch together in the clubhouse where they discuss Jack buying Arnie out. Jack pays for the breakfast and the greens fees for the two to play a round of golf together. After their round is over, they retire to the clubhouse bar for drinks and discuss the buy-out some more. Jack may deduct half the cost of the breakfast, greens fees, and drinks.
You don't have to be as generous as Jack above. You may take a deduction even if your outing is "Dutch-treat"--that is, you only pay for your own expenses.
It's very important to carefully document all business entertainment deductions because the IRS scrutinizes them carefully and with a jaundiced eye. You need to write down:
Example: Jack from the example above records the following information in his datebook: "Golf and Columbus Country club with Arnie on July 10, 20XX, preceded by breakfast at clubhouse restaurant and drinks at clubhouse bar. Discussed my purchasing Arnie's business."
Of course, you also need a record of the amount you spent--receipts will accomplish this.
If you need tax help, talk to a tax professional, such as a certified public accountant or a tax attorney. A tax professional can prepare tax returns, give tax information and guidance, as well as provide representation before the IRS.
]]>For example, if you buy a $2,000 computer and use it for your sales business, you could deduct the full cost from your taxes. If you were in the 28% federal income tax bracket, this would save you $560 in income tax.
In effect, you’d be getting a 28% discount on the computer. The catch is you must use the computer or other item you buy for the business. You can’t deduct personal expenses.
Common tax deductions taken by salespeople include the following.
The single most claimed tax deductions for all small businesses are car and truck expenses. The cost of all driving you do for your sales business, with the important exception of commuting to and from your home to work, is tax deductible.
If you like recordkeeping, you can keep track of all your car expenses to figure your annual deduction. But, if you’d rather not keep track of how much you spend for gas, oil, repairs, car washes, and so forth, you can use the standard mileage rate. When you use the standard rate, you only need to keep track of how many miles you drive for business, not how much you spend on your car.
The amounts you spend on your business office are deductible business expenses. For example, you may deduct the rent and utilities you spend on an office.
But, if you work at home, you might be able to deduct the cost of your home office. This deduction is particularly valuable if you are a renter because it enables you to deduct a portion of your monthly rent, a sizable expense that is ordinarily not deductible.
You may also deduct your expenses when you go out of town for your sales business. These include airfare or other transportation costs and hotel or other lodging expenses.
But, you may only deduct 50% of the cost of meals when you travel on business. If you plan things right, you can even mix pleasure and business and still get a deduction.
Salespeople often purchase tangible personal property that lasts for more than one year, such as computers and office furniture. The full cost of such property can usually be deducted using bonus depreciation, Section 179 expensing, regular depreciation, or the de minimis safe harbor (applicable to property that costs $2,500 or less).
Supplies are business items that you use up in less than one year. They include everything from paperclips to postage stamps.
You can deduct fees that you pay to attorneys, accountants, consultants, and other professionals if the fees are paid for work related to your business.
Insurance you buy just for your business is deductible—for example, business liability insurance or insurance for business property. If you have a home office, you may deduct a portion of your homeowners insurance. Self-employed people are also allowed to deduct 100% of their health insurance premiums from their income taxes.
You can only deduct clothing you buy for business use if it can’t be used for ordinary street wear. This means you can’t deduct a regular business suit. However, you may deduct the cost of a sport jacket, coat, or other clothing item with a company logo on it.
You can deduct the cost of designing and maintaining a website you use for business. You can also deduct your internet hosting fees and the cost of obtaining a domain name for your business.
Gifts you purchase for clients are deductible as a business expense, but the deduction is limited to $25 per person per year. However, the $25 limit applies only to gifts to individuals. It doesn’t apply if you give a gift to an entire company, unless the gift was intended for a particular person or group of people within the company. These company-wide gifts are deductible in any amount, as long as the amount is reasonable.
You get no deduction for the monthly charges for a single phone in your home, whether a land line or cell phone. But you may deduct extra costs for long distance phone calls and special phone services you use for your sales business such as call waiting or message center. You may deduct the full cost of a second phone you use for business, including a cell phone. If you use a second phone both for personal and business calls, you’re required to document your business use.
The vast majority of self-employed salespeople operate as pass-through businesses. A "pass-through" business is any business in which the profits are taxed on the owner’s individual tax return at his or her individual tax rates. Most salespeople are sole proprietors (a one-owner business in which the owner personally owns all the business assets), but some have formed limited liability companies, S corporations, or are members of partnerships.
The Tax Cuts and Jobs Act established a brand new deduction allowing owners of such pass-through businesses, including salespeople, to deduct an amount equal to up to 20% of their net income from the business. For example, if you earn $100,000 in profit from your sales business, and qualify for the pass-through deduction, you may deduct $20,000..
However, you're entitled to the full 20% pass-through deduction only if your taxable income from all sources after deductions is less than a certain limit, which changes annually. The deduction is phased out if your income exceeds the limit.
This is a personal deduction salespeople can take on their returns whether or not they itemize. This deduction began on January 1, 2018 and is scheduled to last through December 31, 2025.
To learn more about making the most of your tax deductions, see Nolo's book Deduct It! by Stephen Fishman, J.D.
If you need tax help, talk to a tax professional, such as a certified public accountant or a tax attorney. A tax professional can prepare tax returns, give tax information and guidance, as well as provide representation before the IRS.