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Business Owners: Be Sure You’re Properly Classifying Cash Flows

By Robert P. Russo CPA

Properly prepared financial statements provide a wealth of information about your company. But the operative words there are “properly prepared.” Classifying information accurately isn’t always easy — especially as the business grows and its financial transactions become more complex.

Case in point: your statement of cash flows. Customarily, it shows the sources (money entering) and uses (money exiting) of cash. That may sound simple enough, but optimally classifying different cash flows can be complicated.



Under U.S. Generally Accepted Accounting Principles (GAAP), statements of cash flows are typically organized into three sections: 1) cash flows from operating activities, 2) cash flows from investing activities, and 3) cash flows from financing activities. Let’s take a closer look at each.

Operating Activities

This section of the statement of cash flows usually starts with accrual-basis net income. Then, it’s adjusted for items related to normal business operations. Examples include income taxes; stock-based compensation; gains or losses on asset sales; and net changes in accounts receivable, inventory, prepaid assets, accrued expenses and payables.

The cash flows from operating activities section is also adjusted for depreciation and amortization. These noncash expenses reflect wear and tear on equipment and other fixed assets.

The bottom of the section shows the cash used in producing and delivering goods or providing services. Several successive years of negative operating cash flows can signal that a business is struggling and may be headed toward liquidation or a forced sale.



Investing Activities

If your company buys or sells property, equipment, or marketable securities, such transactions should show up in the cash flows from the investing activities section. It reveals whether a business is reinvesting in its future operations — or divesting assets for emergency funds.

Business acquisitions and disposals are generally reported in this section, too. However, contingent payments from an acquisition are classified as cash flows from investing activities only if they’re paid soon after the acquisition date. Later, contingent payments are classified as financing outflows. Any payment over the liability is classified as an operations outflow.

Financing Activities

This third section of the statement of cash flows shows your company’s ability to obtain funds from either debt from lenders or equity from investors. It includes new loan proceeds, principal repayments, dividends paid, issuances of securities or bonds, additional capital contributions by owners, and stock repurchases.

Noncash transactions are reported in a separate schedule at the bottom of the statement of cash flows or in a narrative footnote disclosure. For example, suppose a business buys equipment using loan proceeds. In such a case, the transaction would typically appear at the bottom of the statement rather than as a cash outflow from investing activities and an inflow from financing activities.

Other examples of noncash financing transactions are:

  • Issuing stock to pay off long-term debt, and
  • Converting preferred stock to common stock.

In those two instances and others, no cash changes hands. Nonetheless, financial statement users, such as investors and lenders, want to know about and understand these transactions.

Help is Available

As you can see, deciding how to classify some transactions to comply with GAAP can be tricky. Whenever confusion or uncertainty arises, give us a call. We can work with you and your accounting team to make the best decision. We can also help you improve your financial reporting in other ways.


MEET ROBERT P. RUSSO, CPA PC

Picture a typical CPA. Then, meet Bob. He’s only by the book when it comes to accounting, in his interactions with people, he jumps off the page. As the founder and principal of Robert P. Russo Accounting, Bob pleasantly surprises clients (plus the IRS and lawyers) with his proactive, caring, and interested approach. Bob’s authentic passion for both numbers and people is why his firm is sought after by everyone from solopreneurs to CFOs. And it’s what energizes his fast-growing team of top CPAs, who follow his lead by providing impeccable service to clients — without the CPA geek speak.

Robert P Russo CPA PC
Certified Public Accountants
231 W. 29th Street (bet 7th & 8th Ave)
Suite 500
New York, NY 10001
O: 212-279-9800
C: 917-207-9278
F:866-396-2310
www.robertprussocpa.com 

Unlock New Income Streams: Private Lending for Fix & Flip & ADU Projects

Dear Friend;

Thank you for being a part of our network. We want to wish you, your family, and team a Happy and Prosperous 2025.

With this in mind, we’d like invite you to our next live online event. Please note, the date of our webinar has been changed to Saturday, January 11th.

Friends, are you looking for new opportunities to grow your wealth through real estate? Join our exclusive webinar tailored for savvy investors just like you.

What You’ll Learn:

  • How to become a private lender for fix-and-flip and ADU (Accessory Dwelling Unit) projects.
  • Strategies to minimize risk while maximizing returns.
  • Insights into the thriving market of property renovations and ADU investments.
  • Step-by-step guidance on how to get started.

Webinar Details (NEW DATE):

📅 Date: SATURDAY, JANUARY 18TH, 2025
⏰ Time: 11 AM PT / NOON MT / 1 PM CT / 2 PM ET
💻 Where: ONLINE

Whether you’re a seasoned investor or new to real estate, this webinar will equip you with actionable strategies to diversify your portfolio and achieve consistent returns.

Seats are limited, so secure your spot now!

[Register Here]

Take the first step towards becoming a private lender and making your money work smarter for you.
.
See YOU there,

Realty411 Team

CLICK HERE

Since 2007, Realty411.com has assisted top companies expand their visibility and grow their business.
Contact us for a complimentary marketing session. Investors, do you have questions about real estate?

Book a meeting with a Realty411 team member: CLICK HERE.

Licensed in California
DRE #01355569
The REAL Brokerage
DRE #02022092

Real Estate Intel: 10 Most Common ADU Questions (Guest Houses/Tiny Homes)

Expert guidance on building guest houses, granny flats, casitas, pool houses or in-law suites and other small home Accessory Dwelling Units

The rise of the Accessory Dwelling Unit (ADU) has been nothing short of spectacular. Once a niche residential real estate concept, ADUs—often referred to as guest houses, granny flats, casitas or in-law suites—have exploded in popularity, transforming backyards across the nation. This surge in interest reflects a growing need for flexible living spaces, a desire to increase property value, a means to generate revenue, and even a solution to some housing challenges. Many of these builds also exemplify the ever-expanding role ADUs play in reshaping how Americans live, work, and connect.

Gone are the days of drab and cookie-cutter ADUs. Today’s designs push the boundaries of creativity, showcasing how even small spaces can be transformed into stunning, functional living environments. These modern ADUs are not just about adding square footage; they’re about enhancing lifestyles, fostering intergenerational living, and creating sustainable housing options for the future. ADUs also offer a myriad of opportunities to get a leg up in property value and generate income.

Modern-day ADUs aren’t simply small homes; they often stand as vibrant examples of design ingenuity, blending form and function to redefine what’s possible in compact living. Design concepts can demonstrate how creativity, thoughtful layouts and striking aesthetics can transform small spaces into luxurious, livable havens.

For a deeper dive into the value, benefit and process best practices related to ADUs, I connected with Paul Dashevsky and Jon Grishpul—Co-CEOs at Maxable—a national leader in resources for planning, hiring, building and managing ADU, granny flat and other tiny house projects—who offer salient front-line industry insights on some of the most common questions.

Q: First, how would you simply describe an ADU?

PD: An ADU is an additional small housing structure built on a property that already has a main home or main structure. They can be built on a single-family lot or multi-family lot, noting that duplexes count as multi-family. They can be garage conversions, stand-alone units, attic or basement conversions, or be attached to the main house. ADUs are exceptionally flexible, and most owners find that their use for the unit evolves over the years. To be considered an ADUs, the structure must contain everything required for long-term housing of at least 30 days. This includes a full kitchen with countertops and appliances; full bathroom; bedroom or sufficient space for a sleeping area if building a studio; private entrance ; utility connections including water, electric, and sewage. Think of an ADU as a regular home, just on a smaller scale, like an apartment.



Q: What are the best types of ADUs?

PD: The best types of ADUs are the ones that align with your needs, budget, style, and property constraints. In my own professional experience, some of the most popular ADU types include garage conversion and expansion; detached or attached custom-built, above garage, and detached prefab. Garage conversion ADUs are excellent for homeowners that are looking for an affordable option and are tight on space on their property. Plus, you benefit from regulatory benefits. If your garage is found to be in poor condition, it may need to be demolished and rebuilt to complete your ADU project. A detached custom-built ADU provides the greatest flexibility among all options, though it’s often one of the more expensive choices. However, if customization is a top priority, the additional cost may be well worth it. An above-garage ADU preserves not just the garage, but the backyard space too. Most garages are not built to support a second-story, so the garage will need to be reinforced before construction on the ADU can begin. With that in mind, an above garage ADU is the most expensive option.

Q: Will an ADU increase my property value?

JD: Yes, an ADU will almost certainly increase your property value by up to 35%. An additional living space not only enhances the functionality of your property but also makes it more attractive to potential buyers. When building a garage conversion ADU, some homeowners are worried that losing their garage may deter some buyers. But, studies show that many buyers prioritize additional living space over a traditional garage, especially in urban areas where parking may not be as critical. The added value of an ADU often outweighs the loss of a garage, making it an appealing feature for future buyers.

Q: How Much Does it Cost to Build an Accessory Dwelling Unit?

PD: The cost of building an ADU will depend on your region, since labor and material costs vary throughout the country—or even any given state. One main thing to keep in mind is that building an ADU is going to be vastly different from building a larger main house. Every cubic foot counts since you have to fit so much into a smaller space, which means that the cost per square foot will be a bit higher. With that said, using starting cost is a good way gage how much your project will cost. In some states, ADU costs start at about $150,000 and can increase depending on lot characteristics, level of finishes, ADU type and even the time of year.

Q: Can the cost per square foot of an ADU differ, even dramatically, depending on the size and structural form?

PD: Yes, the larger the unit, the cheaper your cost per square foot will be. Detached units can be up to 1,200 square feet or larger if you’re converting an existing space. A 1,200-square-foot unit will probably be cheaper per square foot to build than a 450-square-foot unit. Building up is more expensive. Most people instinctively want to build an accessory dwelling unit above their garage. If your budget is tight, stick to single-story. Building up will add ~$50/square foot to your project. In most cases, a garage conversion is the most affordable way to convert space into an ADU. If your budget is modest keep the existing envelope of the garage, meaning don’t expand on the current footprint as this will add extra cost.

Q: Can ADUs be rented out to others should a homeowner want to utilize their ADU to generate revenue?

PD: Yes, you can legally rent out your ADU. However, the permitted rental duration may vary depending on your local regulations. For example, in California, long-term rentals—defined as terms longer than 30 days—are permitted in all jurisdictions. Most homeowners renting out their ADUs prefer one-year lease terms, as they offer stable income with minimal maintenance requirements. Rental terms under 30 days are often referred to as “vacation rentals” and are commonly listed on platforms like Airbnb and Vrbo. However, some cities prohibit ADUs from being rented for less than 30 days, so do always check your local-area regulations.



Q: How long does it take to build an ADU?

JG: An ADU will take about 10 to 18 months to complete from design to construction finish. This will also depend on the complexity of your project. The general timeline of the ADU process entails design over one to three months; permitting over one to three months; and construction over eight to 12 months. If you are looking for a faster turnaround, a prefab ADU can cut the construction process to as little as one month. Modern prefab ADUs offer a wide range of customization options, allowing you to tailor the space to your needs.

Q: Are there permit and building code considerations relating to ADUs?

JG: Yes, You are required to obtain a permit before you can begin construction on your ADU project. The primary permit you’ll need is a building permit. A building permit explicitly grants you permission to make major changes to your property. Your general contractor will ask for this before they break ground. Your ADU will also need to meet local building and safety codes for housing units. These codes will vary based on your jurisdiction.

Q: How does one go about getting an ADU permit?

JG: The first step to secure a permit is to assess your property’s space, layout and zoning regulations to determine where an ADU could fit best. Next, unless you have experience designing ADUs yourself, it’s optimal to hire an ADU designer who will know exactly how to move you through the process. After brainstorming with your designer, he or she will then develop and draft your permit set to talk specifics, whch will be submitted to the city. This is a large 20-plus page packet of documents typically printed on 24×36 paper. This documentation allows the city to see exactly how your ADU will be placed, how it interacts with its surroundings, its impact on the neighborhood, and other relevant factors. That’s why these permit sets are so detailed and extensive. Luckily, your designer is responsible for drafting all of it. Once completed and with your sign off, your designer will submit the ADU permit set to your local city planning department to go through the permitting process. This will usually take one to three months depending on your jurisdiction. While you wait, this is a great time to begin vetting ADU general contractors. Once your building permit is secured from the city, you can then officially start building your ADU.

Q: Can I finance my ADU project?

PD: Building an ADU can be a significant investment, but there are several financing options available to help make your project more manageable. One option is a HELOC, or Home Equity Line of Credit. This allows you to borrow against the equity in your home, providing a flexible line of credit to fund your ADU project. You can draw on this line as needed and only pay interest on the amount you use. This option is ideal if you want to access funds gradually as construction progresses. Another option is a home equity lump-sum loan that’s secured by your home’s equity. This option offers a fixed interest rate and predictable monthly payments, making it a stable choice for homeowners who prefer a set repayment schedule. It’s ideal for those who need a clear and immediate amount of funding for their ADU construction. A third financing option is a construction loan is a short-term loan specifically designed to fund the building phase of a project. This type of loan typically covers the cost of labor, materials, and permits. Once construction is complete, the loan can often be converted into a traditional mortgage or paid off with other financing options. Construction loans can be ideal for those planning a major ADU build, as they provide upfront funds for the entire construction process.

Today’s ADUs aren’t just tiny homes; they’re often big on innovation, with many across the United States offering a masterclass in design ingenuity, space optimization and aesthetics. Some architectural and interior designs are so progressive, they are redefining what’s possible in small-space living, blending creativity with functionality in ways that are as practical as they are stunning. Looking ahead, the relevance of ADUs is only set to grow. As urban populations swell and sustainability becomes a central focus, the ability to build smaller, energy-efficient homes with reduced environmental impact will be key. Additionally, ADUs offer a pathway to fostering community resilience by creating affordable housing options that work for everyone—from young professionals to retirees.

For its part, Maxable is a one-stop-shop helping homeowners interested in ADUs get started and maintain project oversight, including a library of free educational resources about ADUs, matching service to connect you with pre-vetted designers and contractors in your area, an ADU e-course that provides a comprehensive overview of the ADU building process, ADU project management tools and other helpful resources. The company’s YouTube channel further provides informative videos on all aspects of ADU construction, from design and planning to permitting and construction.

With housing costs soaring, many homeowners are looking for creative ways to maximize their property value while providing additional living options. ADUs offer a flexible, cost-effective way to generate rental income, accommodate aging family members, or even provide young adults with an independent living space—all without the need for costly relocations or massive new developments. And, as cities across the U.S. relax zoning laws and streamline permitting for these backyard beauties, the path to building an ADU has never been clearer.

California Real Estate Agent Charged with Tax Crimes

A federal grand jury in Los Angeles returned an indictment yesterday charging a California man with evading the payment of his individual income taxes and obstructing the IRS in its efforts to collect those taxes.

According to the indictment, Gabriel Guerrero, a Los Angeles-based commercial real estate agent, did not timely file tax returns for many years. In 2014, he allegedly filed more than 10 years’ worth of returns but did not pay the amounts he self-reported he owed. When the IRS began trying to collect those outstanding taxes, Guerrero allegedly sought to prevent the IRS from being able to do so in at least two ways: by not depositing substantial commission checks he earned from commercial real estate sales into his bank accounts and using cashier’s checks to circumvent IRS levies of those accounts.



The indictment also alleges that Guerrero further obstructed collection efforts by submitting false financial disclosure forms to the IRS, which significantly underreported his income and by not disclosing a bank account he used to deposit his income.

In total, Guerrero is alleged to have caused a tax loss to the IRS of more than $350,000.

If convicted, he faces a maximum penalty of five years in prison for tax evasion and three years in prison for obstructing the IRS. A federal district court judge will determine any sentence after considering the U.S. Sentencing Guidelines and other statutory factors.

An indictment is merely an allegation. All defendants are presumed innocent until proven guilty beyond a reasonable doubt in a court of law.

December’s Top 10 Celebrity Real Estate News

Robert Redford, Sean Hannity & Sylvester Stallone made real estate news in December. Top 10 Celebrity Real Estate News is featured at TopTenRealEstateDeals.com.

December’s Top 10 Celebrity Real Estate News

Paul Newman’s New York Penthouse
The longtime home of Paul Newman and Joann Woodward has hit the market for $9.95 million. The very popular 1950s-to-’80s couple used the 3,000-square-foot apartment with views of Central Park as their romantic New York pied-à-terre. Newman died in 2008; Woodward is still alive and living in Connecticut.

Jim Carrey Sells Magical Sanctuary
The LA home Jim Carrey called his “magical sanctuary” has sold after almost two years on the market. The home has five bedrooms, six full baths, a home theater, and even an art gallery space where Jim displayed his own impressive creations. The home was most recently listed at $19.75 million.



Sean Hannity Moves Closer To President Donald Trump
Sean Hannity has moved closer to President Donald Trump, spending $23.5 million on a 12,378-square-foot home in Manalapan, Florida. The eight-bedroom, 10.5-bath mansion is located on both the Intracoastal and the Atlantic Ocean, about 30 minutes from Mar-a-Lago. Hannity sold his New York mansion in early 2024 for $12.7 million, telling his radio listeners that he was “done” with the Empire State and would be moving to the “free state” of Florida.   

Lower Price On Rob Lowe’s House
Rob Lowe has knocked another chunk off the asking price of his LA home. Originally listed in July at $6.575 million, Rob has now cut the price twice for a total discount of more than $1 million. The new asking price is  $5.49 million for the four-bedroom 2,940-square-foot home in Beverly Hills’ Franklin Canyon neighborhood.  

Robert Redford’s Serene Seaside Cottage
Robert Redford has listed his Tiburon, California home for $4.15 million. Listed as “A Serene Seaside Cottage,” Redford bought the home with views of the San Francisco Bay in 2020 for $3.1 million.

Sylvester Stallone Buys Mansion For His Lucky Daughters
Sylvester Stallone is a giving person, donating to several charities for children and military veterans. He is also very generous to his family, having just purchased an 11,644-square-foot home in the Hamptons for his three daughters to use. Now living in Palm Beach, Florida, Sylvester bought the eight-bedroom home in East Hampton sight unseen for about $25 million. The home came fully furnished, located about one mile from the ocean.  

Michael Jordan’s Mansion Buyer
The buyer of retired NBA star Michael Jordan’s 56,000-square-foot Chicagoland mansion is John Cooper, a longtime Jordan fan and real estate investor. On the market for over 12 years, the nine-bedroom home on eight acres is loaded with amenities, including an indoor regulation-sized basketball court. The home was originally listed at $29 million, before a long series of price cuts, until Cooper picked it up for about $9.5 million.

Jennifer Lopez Moving On, But Staying Put
Jennifer Lopez may be finished with Ben Affleck, but she is staying put in the Beverly Hills mansion she shared with Ben. After their 2022 marriage, Jennifer and Ben spent months searching for their perfect blended-family home in LA before they settled on a $60.8 million, 12-bedroom home in Beverly Hills. With the divorce action, Ben and Jennifer listed the home for $68 million. That home has been on the market since July and is costing the ex-couple almost $300,000 a month in expenses. Ben moved out of the home several months ago.  



Historic Key West Property – Ernest Hemingway Stayed There
Located just a block from Duval Street, a unique Key West property is for sale at $6.9 million. Originally a hotel with a Ford dealership on the ground floor, it was where Ernest Hemingway stayed for a month while awaiting delivery of a car in 1928.

Mary Tyler Moore’s Connecticut Home
The Mary Tyler Moore Show was one of television’s most popular programs from the 1970s, starring Mary as an associate producer on Minneapolis’s low-rated WJM-TV. The show aired on CBS and won numerous awards, including 29 Emmy Awards. Mary’s longtime home in Greenwich, Connecticut is for sale at a reduced price of $16.9 million.

For more celebrity home news and celebrity home video tours, visit TopTenRealEstateDeals.com.

Build Wealth with Land Banking

Dear Investors,

As you look ahead to the promising investment landscape of 2025, it is essential to recognize the enduring value of certain assets that consistently outperform market fluctuations. One such asset is land banking—a strategy that remains resilient regardless of economic cycles.

In a world where trends come and go, land stands as a steadfast pillar of wealth creation. Investing in land offers not only a tangible asset but also the opportunity to harness its inherent potential. Whether markets rise or fall, the relevance of land remains unwavering.

Consider the possibilities that await you in this realm. By strategically acquiring land now, you are laying the groundwork for future growth and stability. Each parcel you invest in is not just a plot of earth, but a gateway to opportunities, serving both as a hedge against inflation and a platform for long-term prosperity.

As you embark on your investment journey in 2025, let land banking be a cornerstone of your portfolio. Embrace its transformative power and watch as your vision for financial freedom unfolds with this time-tested asset.

Join us for our upcoming webinar as my friend and industry expert, Marcella Silva shares invaluable insights and knowledge about this tried-and-true investment.

Register for Webinar on January 11th at 11 AM Pacific:

https://register.gotowebinar.com/register/7921638674369302104

  • The Value of Land: Discover why land remains a timeless sought-after asset and its role in the broader real estate market.
  • The Future of Energy & Real Estate: Dive deep into the intersection of renewable energy and land value appreciation.
  • Strategies for Success: Learn how to position yourself advantageously in this expanding market.
  • Laws Behind the Land Rush: Learn about the mandates causing the largest land rush in history.

See you soon!

Linda with Realty411.com

PS: This is your chance to enhance your investment strategy and unlock a new world of investing. Register now to secure your seat.

Since 2007, Realty411.com has assisted top companies expand their visibility and grow their business. Contact us for a complimentary marketing session. Investors, do you have questions about real estate investing? Are you looking for a turnkey rental? Need a solid REI referral?

Book a meeting with a Realty411 team member: CLICK HERE.

Licensed in California
DRE #01355569
The REAL Brokerage
DRE #02022092

Unlock New Income Streams: Private Lending for Fix & Flip & ADU Projects

Please review this important post from our sponsor, thank you.


Hello Investor;

Are you looking for new opportunities to grow your wealth through real estate? Join our exclusive webinar tailored for savvy investors like you.

What You’ll Learn:

  • How to become a private lender for fix-and-flip and ADU (Accessory Dwelling Unit) projects.
  • Strategies to minimize risk while maximizing returns.
  • Insights into the thriving market of property renovations and ADU investments.
  • Step-by-step guidance on how to get started.

Webinar Details:

📅 Date: SATURDAY, JANUARY 18TH, 2025
⏰ Time: 11 AM PT
💻 Where: ONLINE

Whether you’re a seasoned investor or new to real estate, this webinar will equip you with actionable strategies to diversify your portfolio and achieve consistent returns.

Seats are limited, so secure your spot now!

[Register Here]

Take the first step towards becoming a private lender and making your money work smarter for you.

See YOU there,

Realty411 Team

Avoid IRS Audits: Fix the 1099 Prepaid-Rent Mismatch

Two questions:

  1. Are you prepaying your 2025 rent so that you have a big 2024 tax deduction?
  2. How do you identify in your accounting records the monies you put on your IRS Form 1099-MISC for the business rent payments to your landlord?

For the 1099-MISC, do you simply look at your checkbook or payment ledgers to identify the amounts you are going to report? If so, you will create an incorrect 1099 for your landlord that’s going to cause your landlord a tax problem.

One golden rule when it comes to your landlord is “do not cause your landlord tax trouble.”

Let’s say you wrote a $55,000 check to your landlord on December 31 and mailed it that day. Your landlord received the check on January 3. Here’s how your Form 1099-MISC can create a tax problem for your landlord:

  • Your Form 1099-MISC to the landlord shows rent paid of $105,000 ($50,000 paid during the year and then the $55,000 prepayment on December 31).
  • The landlord’s 2024 federal income tax return shows $50,000 in rent received (he received the $55,000 in 2025).
  • IRS computers note the difference and start an inquiry.

An incorrect 1099 that overstates the landlord’s income is a problem that can lead to a tax audit.

One big cause of an incorrect 1099-MISC is not understanding the definition of 1099 income. In this article, you will learn how to use the technically correct methods to eliminate the mismatch problem.



Technically Correct Reporting

Here is an overview of how the rules of a 1099 work. Following this overview, we will dive deeper into the rules and provide insight into how to go about this.

Reporting $105,000 on Form 1099 as rent paid is common but technically incorrect because you, the payor, are supposed to report only the 1099 payments that your landlord received during the year. Note that this is not the amount paid by you during the year but rather the amount received by your landlord during the year.

IRS Reg. Section 1.6041-1(f) says:

The amount to be reported as paid to a payee is the amount includible in the gross income of the payee . . .

Note. As you will see below, this amount does not necessarily equal the tax deduction claimed by the payor.

Reg. Section 1.6041-1(h) says:

For purposes of a return of information, an amount is deemed to have been paid when it is credited or set apart to a person without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made and is made available to him so that it may be drawn at any time, and its receipt brought within his own control and disposition.

The 1099-MISC is a “return of information.”

The landlord did not have control of the money until he or she had possession of the check in 2020. In Cheryl Mayfield Therapy Center, the court stated:

A “payment” is made for purposes of section 6041 information returns when an amount is made available to a person “so that it may be drawn at any time, and its receipt brought within his own control and disposition.”

Happy Surprise

As we were doing the research for this article, we were a little surprised that the 1099 could contain a taxable amount to the payee that is different from the deduction amount of the payor.

For example, in this case, the correct 1099-MISC amount is $50,000. That’s the amount you should put on the 1099-MISC you send to the landlord for 2024 even though you are going to deduct $105,000 as a cash-basis taxpayer.

Disagree

Even though we think we have been perfectly logical above, you may be someone who thinks the 1099 has to show the $105,000.

With the 1099-MISC showing the $105,000 and the correct taxable amount being $50,000 for the year, the landlord needs to follow the steps below.



1099-MISC Incorrect and Not Corrected

Depending on what the incorrect 1099-MISC is doing to your landlord’s income, he or she has one of two ways to show or not show the correction.

If the income on the tax return will be less than the total of the landlord’s 1099-MISCs, you can bet that the IRS computers will pick that up. Therefore, the landlord should follow the instructions below, which appear on the back of the 1099-MISC:

Form 1099-MISC incorrect? If this form is incorrect or has been issued in error, contact the payor. If you cannot get this form corrected, attach an explanation to your tax return and report your income correctly.

Let’s say you don’t correct the 1099. What does the landlord do?

Some practitioners like to report the incorrect 1099 amount in the income line so that it matches with IRS records. Then, they enter an offsetting expense to make the income right. Finally, they add a statement to the return explaining the fake expense number and why it is there.

If the landlord’s income on the tax return is greater than the total of the 1099-MISCs, he or she should follow the instructions for line 1 of Schedule C, which state:

Enter gross receipts from your trade or business. Include amounts you received in your trade or business that were properly shown on Forms 1099-MISC. If the total amounts that were reported in box 7 of Forms 1099- MISC are more than the total you are reporting on line 1, attach a statement explaining the difference.

We know that the landlord likely does not put rental income on Schedule C, but the principles for reporting 1099 income on Schedule C apply equally to Schedule E and other tax forms.

Two things to know:

  • The instructions say to attach a statement when the forms 1099-MISC are more than the total income.
  • When the forms 1099-MISC are less than the reported income, no explanations are necessary, because your total income is correct.

Audit-Proofing Tactics

  1. You should send your prepayment checks by certified mail or one of the other many methods that prove date of delivery.
  2. You and the landlord should retain the correspondence and envelopes involved in attempts to get the 1099-MISC corrected.
  3. When the 1099 is incorrect, make sure to report the incorrect amount on the tax return and then adjust it with a separate line item and statement so that the IRS computers do not have a mismatch problem.

Takeaways

With proper reporting of 1099 amounts, you and the recipients can avoid mismatched amounts not only between yourselves but also the mismatches that the IRS computers will identify.

When you prepay rent, the amount you report on the 1099-MISC to the landlord will not agree with your books of account. In our opinion, this is the correct method of reporting the 1099 amount, as explained in the IRS regulations contained in this article.

When the 1099 is incorrect, your landlord should contact you and request a corrected 1099. If you refuse to change the technically incorrect amount, the landlord should report the 1099-MISC amount as income and subtract out the incorrect income on a separate line item, accompanied by an explanation as to why the 1099-MISC is incorrect.

MEET ROBERT P. RUSSO, CPA PC

Picture a typical CPA. Then, meet Bob. He’s only by the book when it comes to accounting, in his interactions with people, he jumps off the page. As the founder and principal of Robert P. Russo Accounting, Bob pleasantly surprises clients (plus the IRS and lawyers) with his proactive, caring, and interested approach. Bob’s authentic passion for both numbers and people is why his firm is sought after by everyone from solopreneurs to CFOs. And it’s what energizes his fast-growing team of top CPAs, who follow his lead by providing impeccable service to clients — without the CPA geek speak.

Robert P Russo CPA PC
Certified Public Accountants
231 W. 29th Street (bet 7th & 8th Ave)
Suite 500
New York, NY 10001
O: 212-279-9800
C: 917-207-9278
F:866-396-2310
www.robertprussocpa.com 

Online Education on Land Banking

Join us for our next online Realty411’s Education and gain access to wonderful real estate insight and off-market properties.

Online Event: Saturday, January 11th, 2025 — 11 AM PT

Each online event meeting will feature a special educator, plus guests will have the opportunity to chat and ask questions. For this session, we are focusing on LAND BANKING.

Our goal is to make a fantastic online and offline environment where learning and growing are key. We hope to assist many investors on their journey towards real estate success. Be sure to register today.