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Posted by D. Stussy on April 16, 2008, 11:51 pm
Please log in for more thread options > joetaxpayer wrote:
> > Victor Roberts wrote:
> >> Here's a tax question posed to me by my son regarding some
> >> of his friends.
> >> Tenants of a rental property improve the property. The cost
> >> of labor plus materials is $6000.
>
> "Cost of labor" is not the correct term, unless the tenants hired an
> employee or subcontractor to do the work. Your own labor is not a cost
> to you, for tax purposes.
>
> > Their landlord pays them
> >> for the improvements by forgiving $6000 in rent payments.
>
>
> He didn't forgive any rent. It was a bartering (cashless) business
> transaction, with a fair market value of $6,000 (determined by two
> parties with adverse economic interests in an arm's-length transaction).
> As already noted, each side had $6,000 of income.
And under this view, the 1099-MISC is the wrong document to file for the
transaction. 1099-B is the correct document. However, see below.
> >> I understand that the tenants are obligated to pay
> >> self-employment taxes on that portion of the $6000 that
> >> represents their labor.
>
> The self-employment tax is based on their net profit, not just their
> labor. If they were smart and added a mark-up to the materials(1), they
> pay SE tax on that too. If their net profit was low enough
> (approximately $433), they won't even owe that, just income tax.
>
> (That is, the amount left over
> >> after they deduct the cost of purchased materials from the
> >> $6000 total on their Schedule C.
>
> And after they also deduct any other ordinary and necessary business
> expenses, such as business use of a vehicle to pick up materials and
> supplies for the job, small hand tools, etc.
>
> [...]
> > Your son's friends are worse off. They now have a 1099. Even though they
> > should pay tax on the labor, it seems they have a 1099 for the full
> > amount. Landlord sounds like he slimed them.
>
> Not really. If they had paid the rent in cash from wage income, they
> still would have paid (directly and indirectly through their employer)
> full FICA taxes on the equivalent labor. They also didn't have to incur
> non-deductible expenses such as commuting, as they would with wage
> income. Plus, they were able to schedule the work at their own
> convenience, rather than have their privacy and peaceful enjoyment
> interrupted by the schedule of some outside contractor hired by the
> landlord.
>
> (1) not sure if that would trigger a sales tax obligation for the
> mark-up, assuming they paid sales tax on their purchase price.
How is this a business transaction for the tenant? There's no FICA taxes
involved here. The landlord paid NOTHING (i.e. no check was issued), so the
1099 is erroneous. The tenant made a leasehold improvement, but we don't
know if it's permanent or will be removed when the lease is up, so there's
nothing TO the landlord either.
--
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