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Jax Tax
Jax Tax, Tax Attorney
Category: Tax
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Experience:  JD, LL.M in Business and Taxation, IRS Enrolled Agent. Expert in Business and Tax Transactions
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Loan incorrectly reported as income on 1099-MISC

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Working on 2007 return. Own 1 rental property with USPS as tenant. Received rent income ~35K. Replaced HVAC in 2007 for total cost of 30K. Lease addendum stated USPS will contribute 35% (~10K) of cost, and lessor will contribute 65% (~20K) of cost. Upon completion, USPS shall pay 35%, and lessor will pay 65% via rental abatement amortized over 10 years at 8% interest, payable to USPS (~250/month). MAIN ISSUE: USPS sent me a check for ~$30K, and then listed this amount as Non-Employee Compensation (Box 7) on Form 1099-MISC. At the same time, an equivalent of 250/month was deducted from rental income in Box 1 on 1099-MISC. Was that correct?? I don't think the 30K should have been reported as income! 10K was USPS responsibility and 20K was a loan!

Jax Tax : First, the amount they pay for the AC is income, but it is rental income in the year you receive it. So, the portion you received will be rental income in the year you receive it. The interest, interest income on 1040 sch B. The cost of the AC will be depreciated and expensed.
Jax Tax : They should not have reported it that way and should have included the portion paid as rental income and the interest as such on the 1099.
Jax Tax : You need to request they fix it. If not, file the return with an explanation as to why it is not included.

Is there a statute of limitations for fixing a 2007 Form 1099-MISC?

Jax Tax : I know you are wondering why it is reported as rental income. Just trust me it is.

The interest on the loan is interest expense paid to USPS (not interest income for Sched B). They fronted the full cost of the system. 10K was their portion of the agreement, my 20K portion was loaned to me, which I am repaying by rent deduction.

Jax Tax : They can correct it at any time.

How should the 30K appear?

Jax Tax : OK. I had it backwards.
Jax Tax : If they paid the full amount, the full amount is rental income in 2007, you will depreciate it, and you are correct, interest is an interest expense on sch e.
Jax Tax : The 30k should be reported as rental income.

Even though 20K was a loan?

Jax Tax : Yes. It is being deducted from rent so it is rent. It is reported in 2007 as rent because it is constructively considered prepaid rent. You will only report the net rent in future years.
Jax Tax : You will report the interest income in the year it is offset.

Interest expense?

Jax Tax : No. Interest expense. Sorry, I keep doing that. You will be report the reduction for interest as an interest expense and also claim the reduction as rental income. The will offset each other.

Can I show this as a loan so it is not income, and add the full rent deductions back into the rental income? They even provided me with an amortization schedule.


Would a corrected 1099-MISC help in this regard?

Jax Tax : Think of it this way. If they were paying you full rent and you then paid them the interest, that is what it would be. This is the same thing just skipping a step.

Even though I am filing late, I thought I had paid more than sufficient taxes at the time. If the 30K is shown as income, then I will face interest/penalties...

Jax Tax : Yes because the IRS is expecting the $30k to be on sch C the way it is reported which self.employment tax is applied. 15.3 percent. They should report actual rent and the 30k as rental income to you in 2007. In other years they shouldn't be reporting the net rent paid plus the interest reduction as rent to you. You report the rent and deduct the interest.
Jax Tax : That is true. You can use form 843 to request the be reduced. Also make sure to use any losses from other years if available. Look at 2006 for sure.
Let me know.if you have additional questions.
Customer: replied 5 years ago.
Not sure I fully understand whether I can show this as a loan rather than as rental income in 2007. Can USPS provide me with an updated/corrected 1099 to facilitate this? ... How would I use Form 843?
You must show it as rental income. It is rental income as it is being repaid as a reduction of rent. As a cash basis taxpayer, you must report the money in the year you receive it. It is considered prepaid rent. Here is a quote from the IRS.
If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Include it in your income when you receive it.

Expenses Paid by Tenant

If your tenant pays any of your expenses, the payments are rental income. You must include them in your income. You can deduct the expenses if they are deductible rental expenses. See Rental Expenses in Publication 527, for more information.,,id=98895,00.html

Your situation is not right on point with any of these examples as the payment exceeds the monthly rent and is reduced over time as well as being combined with advanced rent reporting, but it must be reported as rental income in 2007.

I do see your point regarding the loan. I do not want you to think that I do not, but the issue is how the contract was set to be a reduction of rent and when you received the money. Even if paid directly to the HVAC company, it was your responsibility and paid on your behalf by the offer of reduced rent. You received the cash or accession of wealth Sec 61 of IRC in 2007 as you did not have to pay the cost of the HVAC.

One last thing I want to be clear on. The rent was reduced by $250 for 10 years. Is the tenant still there? If not how is the money being repaid if at all, and how was the interest paid if at all. $250 for 10 years is only $30k. Where is the 8% interest?
Here is the issue I am having with spliting this 10k/$20k. The reduction of $250/no in rent is exactly $30k. So really no portion was their responsibility because rent was reduced by this amount. Anyway I try to take a principle of $20k with 8% simple or compounding interest at any interval, I can't make $20k $30k in repayments. At 8% simple it would be $36k. At flat 8%, $21600. At any compounding rate much more than $36k.
That goes.back to my question. Where is the 8% interest and it calculated to $250/no over 10 years to equal $30k the exact cost?
Customer: replied 5 years ago.
I had used rounded numbers for simplicity. Exact HVAC cost = $31,786. USPS paid 35% = $11,125. Loan amount of 65% = $20.661. 10 year loan at 8% = 120 payments of $250.67. So the loan repayment includes interest of $9419.91 over 120 months, for a total of $30,080.72 (at least according to my Excel file)
OK. That makes sense. The rent then was only reduced by the 20k not the 30k. So, only the 20k should be rent in 2007 if the rent was only reduced by the $20k. The interest would then be an expense and rental income in the year of the associated reduction offsetting each other.

So, we need to determine how much if any of the $10k is considered income. The question is why if not initially bound under the lease did USPS agree to pay $10k. What if anything did they receive in return for agreeing to making that payment?
Customer: replied 5 years ago.

For the 10K, separate air conditioning and heating units were completely replaced with modern efficient package units. USPS received significant energy savings along with a better, more reliable system.


For the 20K, how can I show this as a loan? Did USPS report it correctly? Why would it be different if I went to a bank for the same amount?

If they agreed to the payment to save on energy costs then it is not income to you if rent was not offset. It should not be on the 1099 at all. They need to remove 10k and move 20k to rent. Make sure that you do not depreciate the $30k for the AC. Only the $20k you paid. They will expense their 10k as leasehold improvements or something similar.
That shouldn't do it.
Customer: replied 5 years ago.
Didn't understand the last line about "shouldn't do it"... Can I show the 20K as a loan so it does not impact my 2007 income? Each year, I will report the full rent, which would be the amount that adds the 250/month back into the 1099 rent income. Wouldn't it be this way with a bank loan?

Thank for you for the reference to Leasehold Improvements, which I did not previously consider. (Actually, I didn't even know about it)
Sorry spell check changed the word. Should do it. No, the 20k has to be reported as rental income. I am sorry, but that is the correct answer. If you claimed the full rental income in 2008-2010, you should amend the returns to claim only the net rents received plus interest adjustment as rent and the interest adjustment as an expense.
Customer: replied 5 years ago.
Then I suppose I should have borrowed money from a bank instead of accepting rent reductions. This just doesn't seem fair - that a loan impacted my income and my tax bracket. :-(
You could have borrowed it from the tenant. The problem is you created the repayment as a substitute for rent within the lease. It should have been separatley agreed to and paid regardless of from a bank or the tenant. It is the structure.
Jax Tax and other Tax Specialists are ready to help you
Customer: replied 5 years ago.
Thank you so much for your time, knowledge, and quick responses... If you are still willing to answer, here it is... I highly doubt the USPS will amend the 1099. So (1) On my 2007 return, how do I show that the 10K is not income, and (2) On my returns from 2007 forward, what is worst case scenario if I go ahead and file as if the 20K were structured as a loan? (I am still working on those subsequent years).
Go to the secratary of state website to find their state agent. Send certified a request to fix the issue. Then send copy of reiept and request with explanation with your return.