Beginners Guide for Business and Financial

Archive for the ‘Taxes’ Category

As we begin 2005, you’re probably not thinking about taxes at all. This is a mistake as deadlines are approaching for issuing and filing 1099s to independent contractors.

What is a 1099 MISC?

Generally speaking, the IRS requires you to report certain payments you made during the year to independent contractors. The 1099-MISC form is a single page on which you report to total amount you paid to the independent contractor during 2005.

The 1099-MISC forms must be issued to any person you paid at least $600 in rents, services or other income payments. For example, if you hired a contractor to renovate a room in your home and paid them $5,000, a 1099-MISC filing would be required. As with practically any IRS filing, there are additional situations that require a 1099 filing. Any payments to attorneys must be reported regardless of the amount. Royalties totaling over $10 also must be reported. Generally, you are not required to report payments to a corporation.

When and What Must Be Filed?

The 1099-MISC form is a multi-layered carbon form, so make sure the information you provide appears clearly on all of the copies. Once you fill out the form, provide Copy B to the person you are reporting to the IRS by January 31, 2005.

Copy A of the 1099-MISC form is intended for the IRS. You must file it by February 28, 2005 if you are sending the form by mail. If you prefer to file electronically, you have until March 31, 2005.

The IRS has made a major effort to cut down on red tape, but you’ll still find it with 1099-MISC filings. In addition to filing the 1099 with the IRS, you must also file a 1096 form. The 1096 form is the “Annual Summary and Transmittal of U.S. Information Returns” form. It is one page and extremely easy to fill out.

Although the IRS has an excellent web site, you can’t download 1099 forms off of it. The official forms are still multi-layered carbon paper, which means you need to get a physical copy. The IRS should send you the forms in the mail. If they don’t, you can order them off the IRS site or call the IRS to have them sent to you. If all else fails, you can usually find the forms at major post office and public library locations. If you fail to file 1099s, the IRS will penalize you $50 per 1099.

More than a few people have grumbled about filling out 1099s so early in the year, but doing so has indirect benefits. You are forced to start organizing your records for 2005.

With the booming property prices of recent years, more and more people are finding themselves facing a large tax bill when they come to sell their investment properties.  However, did you realize that there is a perfectly legal way of deferring payment of such taxes by utilizing the advantageous 1031 tax code that was introduced by the IRS in the early 1990s?

A 1031 exchange is a way of deferring payment of capital gains tax on certain types of real estate.  Normally when an investment or business property is sold, capital gains tax has to be paid.  However, with 1031 exchanges, by replacing the old property with a like-kind property, within set time limits, payment of capital gains tax can be avoided.

Under the 1031 exchange real estate rules, a seller must have held a property for at least one year and a day for it to qualify.  Another requirement is that both old (relinquished) and new (replacement) 1031 exchange properties must be of a like-kind – either rental properties, vacant land, trade, business or investment properties.

1031 exchanges must be completed within strict time limits.  There is a 45 day Identification Period from the transfer of the old property, in which a replacement property must be identified.  The 1031 exchange rules stipulate that the exchange must be completed within the 180 day Exchange Period.

The 1031 exchange real estate issues are complex, so it is imperative to seek professional advice from a tax advisor or qualified intermediary who can assess your specific circumstances and explain other issues such as the reverse 1031 exchange or TiC rules.  With careful financial planning, you can reinvest your capital gains in future real estate investments, thereby allowing you to leverage your money more efficiently and to reap greater financial benefits.