Author: Brian Pereira, CPA

KT Insights
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Form 1099 Income Reporting

What You Need to Know

When it comes to tax preparation, many people and businesses rely on the various forms they receive to accurately report their income. Among these forms, the Form 1099 series is particularly significant, as it covers a wide range of income types, from freelance work to interest and dividends.

However, what happens if you don’t receive a Form 1099? Does that mean you can skip reporting that income? The answer is no. The IRS expects you to report all income, regardless of whether you receive a Form 1099. Not receiving a Form 1099 does not relieve you of your legal obligation to report all income. This means that even if you don’t receive a Form 1099, you must still report the income on your tax return.

Potential Consequences

Failing to report income can lead to:

  • Penalties & Interest: The IRS can impose penalties and interest on any unpaid taxes due to unreported income.
  • Audits: Underreported income may increase the likelihood of an audit. The IRS uses various methods to detect unreported income, including matching income reported by payers on Forms 1099 with the income reported on your tax return.
  • Legal Action: In severe cases, failing to report income can lead to legal action, including fines and imprisonment.

What is a Form 1099?

The Form 1099 series include several forms used to report different types of income. Some financial institutions will consolidate the forms into a single statement. The most common 1099s are:

  • Form 1099-MISC: Used for miscellaneous income, such as rents, royalties, and other types of income.
  • Form 1099-NEC: Specifically for nonemployee compensation, such as payments to independent contractors.
  • Form 1099-INT: For interest income.
  • Form 1099-DIV: For dividends and distributions.
  • Form 1099-B: For reporting capital gains/losses.

Why did I not receive a Form 1099?

There are several reasons why you might not receive a Form 1099:

  • Thresholds Not Met: For many types of income, the payer is only required to issue a Form 1099 if the amount paid exceeds a certain threshold.
    • For example, Form 1099-NEC is only required if the total payments for service are $600 or higher in a year.
  • Administrative Oversight: Sometimes, payers simply forget or fail to issue the required forms.
  • Incorrect Information: If the payer has incorrect information, such as an outdated address, you might not receive the form.

Reporting Income Without a Form 1099

Steps to ensure you accurately report income even if you don’t receive a Form 1099:

  1. Keep Detailed Records: Maintain thorough records of all income received throughout the year. This includes bank statements, invoices, receipts, and any other documentation that can substantiate your income.
  2. Estimate if Necessary: If you don’t have exact figures, make a reasonable estimate based on your records. It’s better to report an estimated amount than to omit the income entirely.
  3. Consult a Tax Professional: If you’re unsure about how to report certain types of income, consult a tax professional. They can provide guidance and ensure you comply with IRS requirements.

Receiving a Form 1099 is a helpful reminder to report certain types of income, but it is not the only indicator of your tax obligations. The IRS expects you to report all income, regardless of whether or not you receive a Form 1099. By keeping detailed records, using the correct forms, and consulting with a tax professional, if necessary, you can ensure that you meet your tax obligations and avoid potential penalties and legal issues.

Please reach out to your KT Tax Advisor for advice related to your specific tax situation.

March 11, 2025
| Brian Pereira, CPA
KT Insights
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Understanding the IRS’s Real Estate Professional Status

Being a real estate professional in the eyes of the IRS offers several benefits, particularly in terms of tax advantages. One of the primary benefits is the ability to deduct losses from real estate activities against other types of income, such as W-2 income or 1099 non-employee compensation. This can significantly reduce your overall tax liability.

The IRS generally presumes all rental activities are passive, which means that rental losses can only offset passive income. As a result, net losses will be suspended and carried forward until you have other passive income, or you sell the property. Qualifying as a real estate professional changes the nature of the rental activities from passive to nonpassive, allowing you to deduct losses in the current year. Lower taxes can help with increased cash flow allowing for additional real estate investments.

Additionally, if you have overall positive net income from rental activities and qualify as a real estate professional, the income is not subject to the additional 3.8% Net Investment Income Tax (NIIT) which applies to passive income.

But do you qualify as a real estate professional? To be eligible, you must pass three tests:

More Than 50% Test

More than half of your time working during the tax year must be in real property trades or businesses in which you materially participate.

The IRS considers the following as real property trades or businesses: real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, and leasing.

You must own at least 5% of the business to qualify, so working as a W-2 employee for someone else does not count.

750-Hour Test

You must perform more than 750 hours of services in these real property trades or businesses during the year.

Material Participation Test

You must materially participate in each real property trade or business. You are considered to participate materially if you meet just one of the following criteria:

  • Work more than 500 hours in the activity.
  • Do substantially all the work in the activity. This test can be difficult to meet if you have a property manager.
  • Work more than 100 hours in the activity, with no one else working more than you.
  • You materially participated in the activity for any five (whether or not consecutive) of the ten immediately preceding tax years.

Note that these tests are evaluated on an annual basis, so you may qualify one year and not the next. A married couple can count the time of both spouses to meet the material participation test, but not the More Than 50% Test or the 750-Hour Test.

If you have multiple rental properties, you can elect to treat all interests in rental real estate as a single activity. This election simplifies meeting the material participation requirement and can be made on your original tax return.

The IRS scrutinizes claims of real estate professional status closely. It is important to keep accurate and detailed records of your hours and activities, such as calendars and receipts to substantiate material participation.

Please reach out to your KT Tax Advisor if you think this may apply to your tax situation.

February 25, 2025
| Brian Pereira, CPA
KT Insights
 |

The Pitfalls of Using AI to Prepare Taxes

As technology continues to advance at a rapid pace, artificial intelligence (AI) has become an increasingly popular tool in various industries, including finance and accounting. In a February 2024 survey, approximately 20% of Americans used AI software to review their tax returns. While AI software offers benefits like speed and convenience, there are several pitfalls to be aware of when using AI to assist in the preparation of your taxes.

Accuracy and Errors

One of the most significant risks of using AI software is the potential for errors. While AI can process large amounts of data quickly, it is not immune to mistakes. Errors in algorithms or user input can lead to incorrect tax returns, which can result in penalties, fines, or even audits.

Limited Contextual Understanding

AI lacks the nuanced judgment that accountants possess. This can be a major limitation when it comes to interpreting complex tax laws or understanding the context behind specific financial situations. For example, AI might misinterpret the classification of income or deductions, leading to inaccurate tax calculations. Additionally, AI may struggle to understand unique or unusual financial transactions, which could have a significant impact on your tax return.

Lack of Flexibility

AI software follows a predefined set of rules and may not be adaptable to unconventional tax scenarios or specialized business structures. This rigidity can result in the omission of potential deductions or credits that could be beneficial. It may also lead to incorrect categorization of income or expenses, affecting the overall outcome of your tax return. For example, AI may not be able to assist with deciding whether your business should be a partnership or corporation, understand multi-state filings, or know what to do with international income.

Compliance with Tax Laws

Tax laws and regulations are constantly evolving, and AI software may not have the most up to date information. If the software you use is not updated to reflect the latest changes in tax legislation, you could unknowingly violate tax laws. This could result in fines, penalties, or legal trouble.

Security and Privacy Risks

When using AI software, you are entrusting sensitive financial information to a digital platform. This introduces the risk of security breaches or data leaks. A breach could lead to identity theft, financial fraud, or other malicious activities. To mitigate this risk, ensure that you are not entering personal information on any AI platform.

AI technology is not going away. However, the pitfalls surrounding this technology are apparent. I suggest consulting with your KT tax professional. We will provide the assistance and care that your tax return deserves.

June 17, 2024
| Brian Pereira, CPA
KT Insights
 |

New Incentives to Trade in your Gas Guzzler

The Inflation Reduction Act of 2022 encourages taxpayers to consider switching from gas powered vehicles to electric vehicles by expanding the New Clean Vehicle Credit and introducing the Used Clean Vehicle Credit. Requirements of both credits include purchasing the vehicle from a dealer, using the vehicle primarily within the United States, and not purchasing the vehicle for resale. The credits are nonrefundable; however, any unused amount will be carried forward.

The New Clean Vehicle Credit amount is limited to $7,500. The Used Clean Vehicle Credit amount is 30% of the sales price up to a maximum amount of $4,000. The vehicles must meet certain qualifications. For details on the qualifications, see our article titled There Are No Credits like Energy Credits.

The U.S. Department of Energy website is available to confirm the qualification of a vehicle. Dealers are required to report the tax credit information to the IRS and provide a copy of the IRS’s approval to the purchaser.

Starting in 2024, taxpayers can opt to monetize the $7,500 New Clean Vehicle Credit by transferring it to the dealer at the time of purchase. This will lower the amount the taxpayer pays for the car; however, this should be used with caution as the credit may need to be repaid if the taxpayer’s modified adjusted gross income exceeds $300,000 for joint filers, $225,000 for heads of household, or $150,000 for singles.

If you have questions on any of these credits, speak with your tax professional at KT to see how it may benefit you.

February 13, 2024
| Brian Pereira, CPA
KT Insights
 |

There Are No Credits Like Energy Credits

With the signing of the Inflation Reduction Act of 2022, the Energy Efficient Home Improvement Credit, previously known as the Nonbusiness Energy Property credit, and the Residential Clean Energy Credit were revived and expanded.

Energy Efficient Home Improvement Credit

The Energy Efficient Home Improvement Credit is applicable only to your primary residence. The credit amount is 30% of the costs of the following improvements, and needs to meet the highest tier of efficiency as established by the Consortium for Energy Efficiency:

  • Residential Energy Property
    • $1,200 cap for energy property costs including central air conditioners, water heaters, and hot water boilers; includes labor for installation.
  • Heat Pumps, Biomass Stoves, and Boilers
    • $2,000 cap; includes labor for installation.
  • Building Envelope Components
    • Exterior Doors – Capped at $250 per door and $500 total.
    • Windows – Capped at $600.
  • Home Energy Audits
    • Capped at $150.

Along with the expansion of the credit, the $500 lifetime credit is no longer applicable as of January 1, 2023. So, even if you have received $500 in the past related to your personal residence, you can now qualify for the new expanded credit.

Residential Clean Energy Credit

The Residential Clean Energy Credit is applicable to your primary residence and secondary home. The credit amount is 30% of the costs of the following improvements:

  • Solar electric property
  • Solar water heating property
  • Geothermal heat pumps
  • Fuel cells
  • Battery storage technology

These energy credits are nonrefundable, and any amount not used in the current year will be carried forward. 

Claiming the Credit

To claim the credit, provide your tax professional with a vendor itemized list of property that was purchased, including the amount paid, and confirmation of installation before the end of the tax year.

Clean Vehicle Credits

The Inflation Reduction Act of 2022 also expanded the New Clean Vehicle Credit and introduced the Used Clean Vehicle Credit. Both credits are nonrefundable, any amount not used in the current year will be carried forward and are only for purchases beginning in 2023. Purchases must be from a dealer, for primary use in the U.S., and must not be for the purpose of resale.

The New Clean Vehicle Credit amount is limited to $7,500 and must meet the following qualifications:

  • The taxpayer’s adjusted gross income thresholds may not exceed $150,000 for single filers and $300,000 for married filing jointly.
  • For vehicles placed in service from January 1 to April 17, 2023, the credit base amount is $2,500 with $417 for battery capacity of at least 7 kilowatt hours and an additional $417 for each kilowatt hour of battery capacity beyond 5 kilowatt hours.
  • For vehicles placed in service from April 18, 2023, and after, the credit is $3,750 if critical mineral requirements are met and another $3,750 if battery component requirements are met.

The Used Clean Vehicle Credit amount is 30% of the sales price up to a maximum amount of $4,000 and must meet the following qualifications:

  • The taxpayer must not be the original owner.
  • The taxpayer must not be claimed as a dependent on another person’s tax return.
  • The taxpayer must not have claimed another used clean vehicle credit in the 3 years before the purchase date.
  • The taxpayer’s adjusted gross income thresholds may not exceed $75,000 for single filers and $150,000 for married filing jointly.

Qualified Vehicles:

  • Have a sale price of $25,000 or less.
  • Have a model year at least 2 years earlier than the calendar year when you buy it. For example, a vehicle purchased in 2023 would need a model year of 2021 or older.
  • Must not have been transferred to a qualified buyer after August 16, 2022.

Claiming the Credit

Taxpayers must use the U.S. Department of Energy website, https://fueleconomy.gov/feg/tax2023.shtml, to confirm the qualification of a vehicle. Taxpayers must also confirm that the seller reported the information, name, and social security number of the buyer to the IRS and provide the Motor Vehicle Purchase Agreement.

If you have any questions on any of these credits, speak with your tax professional at KT to see how it may benefit you.

October 9, 2023
| Brian Pereira, CPA
KT Insights
 |

Building Up the Section 45L Energy Credit

WRITTEN BY BRIAN PEREIRA

What is Section 45L?

Section 45L of the Internal Revenue Code provides a tax credit (dollar for dollar savings on any tax liability) for qualified residential properties. The credit was set to expire on December 31, 2021, however, through the Inflation Reduction Act, the credit has been extended through December 31, 2032.

Residential properties that may qualify for the credit are single and multifamily properties that meet certain energy requirements. The incentive provides a tax credit of up to $2,000 per dwelling unit placed into service prior to 12/31/2022, and a credit of up to $5,000 per dwelling unit placed into service between 1/1/2023 and 12/31/2032.

Is this credit for you?

Eligible contractors, as defined by the IRS, who construct or substantially renovate residential dwelling units within the United States are eligible for the credit. There is no credit limit amount that you can apply for or limit to the number of times that you can claim the credit.

Developers that are involved with affordable housing projects can claim the Section 45L credit along with the Low-Income Housing Tax Credit (LIHTC) without lowering the basis in the LIHTC.

Advantages of the credit

Section 45L gives developers the opportunity to offset the costs associated with energy-efficient residences. Additional benefits include:

  • Building sustainable homes for the community.
  • Increased marketability.
  • Opportunity to minimize tax liability.
  • Ability to offset costs for energy-efficient building materials.

What are the new requirements?

Prior to 2023, developers had to meet the 2006 International Energy Conservation Code standards and were also subject to a three-story limitation on the height of the building.

Beginning in 2023, the available credit amounts vary based on the types of property (single family or multifamily) and the type of certification. The new standards to meet are either the Energy Star or Zero Energy Ready Home (ZERH). For developers of multifamily properties, they can earn higher credits by meeting prevailing wages (PW). The chart below illustrates how these factors affect the credits.

Home TypeEnergy StarEnergy Star with PWZERHZERH with PW
Single Family$ 2,500.00$                  2,500.00$ 5,000.00$    5,000.00
Multifamily$     500.00$                  2,500.00$ 1,000.00$    5,000.00

Additionally, the three-story limitation has been removed.

Who certifies the dwelling unit?

A site visit is conducted by a qualified individual, who has been licensed as a Professional Engineer or as a Registered Architect, to study the eligible unit(s). The individual uses software that has been approved by the Department of Energy (DOE) to calculate the energy savings over the applicable energy standards.

If a project is pursuing DOE ZERH certification, additional reporting is required.

Is Section 45L worth it?

According to an Elevate Rapid City housing study done in 2022, it is projected that the Rapid City region will need a net addition of about 2,979 – 4,021 rental units and 6,084 – 7,149 ownership units. This presents a real opportunity to serve the community with sustainable housing while receiving a tax credit.

If you are interested in the Section 45L credit, speak with your tax professional at Ketel Thorstenson to see how it may benefit you.

June 20, 2023
| Brian Pereira, CPA