Received 1099-NEC from state dept

[Raj_R]

Hello,
I am a landlord with a Section 8 tenant, and the rent is paid by the Housing Authority (I received a 1099-MISC for this, which is all good).

Recently, I had to repair a garage door that was damaged by the tenant. Instead of using the tenant's security deposit, I utilized the "Landlord Mitigation Fund" (a Washington State program). The Department of Commerce reimbursed me for the repair costs and issued a 1099-NEC for the amount.

I’m now confused about how to report this 1099-NEC.

I operate as a single-member LLC and typically report rental income and expenses on Schedule E. However, when I try to report the 1099-NEC in TurboTax, it takes me through a lengthy questionnaire and seems to treat it as business income, requiring me to file it like a "business tax."

This payment was a one-time reimbursement for the repair, and I didn’t provide any services/business to receive it. Ideally, I’d like to report it as "miscellaneous income" and deduct the same amount as a repair expense.

Could you provide any guidance on how to handle this?

[ThomasM125]

The payment is clearly not self-employment income, so it would be appropriate to report it as "Other Income" and make a separate negative entry to other income to cancel it out. After you enter the Form 1099-NEC in TurboTax, you will come to a screen that says Does one of these uncommon situations apply? To which you need to check the box that says the income is not money earned as an employee or self-employed individual:

To exclude the income from taxation:

1. From the Federal menu in TurboTax find Wages and Income 

2. Find Less Common Income

3. Choose Miscellaneous Income, 1099-A, 1099-C

4. Choose Other Reportable Income

5. Enter a description of the adjustment and the adjustment amount as a negative number

[Raj_R]

Thank you for the suggestions. @ThomasM125 

From 'Wages and Income' I see 2 options where we can report 1099-NEC

1. Self-Employment (schedule C) which we don't want
2. Other Common Income: This sounds right.

But going option 2: I dont see the highlighted option you mentioned. I see only this

• Self employment income
• farm income
• hobby
• lawsuit settlement
• medicaid waiver payments 
• income should have reported on W2

Could you please let me know how to get to that screenshot you shared?

Also,  to avoid taxation, can't I use that amount towards 'rental expense' and deduct? (instead of 'other income' as negative number). Wonder what's the difference between the two. May be I can't deduct the entire amount if i use as rental expense.

[ThomasM125]

You must be in a different version of TurboTax then mine. You can choose the "hobby" option. You may be OK deducting the expense from rental income, but rental income and especially rental losses can be treated differently than ordinary income. To be safe, you could try it both ways to see if the tax changes.

[Raj_R]

I Use TT Premier online. May I know what is your version?
Assume you follow the same steps as mine to get to your screenshot (Other common income -> 1099-NEC)

Don't think 'Hobby' is the right choice though. Kinda stuck. 

[PatriciaV]

The screenshot posted by ThomasM125 was from the desktop version of TurboTax. But a similar question appears in TurboTax Online when entering Form 1099-NEC, though it's worded differently.

However, you may wish to report this as income for your Rental Property (without entering it as Form 1099-NEC) so you can also report the related expense. 

Since this was not service income (wages), it should have been reported on Form 1099-MISC, which would have simplified things. The IRS expects you to report all income, and as long as you report at least as much as is shown on the 1099-NEC, you have satisfied the requirements. You also have good reason for reporting this income on Schedule E since it relates to your rental property.

[Raj_R]

Ok. Thanks @PatriciaV 

Wish 'Desktop vs Online' TT versions don't vary much in its questionnaires 🙂 I spent lot of time trying to find the highlighted question by ThomasM125.

One thing I want to call out is the rental property is under Single Owner LLC. (dont think it makes a difference here. I still use Schedule E)

I could report the 1099-NEC as 'Miscellaneous Income'. 

To avoid taxation: Would you recommend adding a "negative" number (of 1099-NEC amount) to 'Miscellaneous Income'. So net zero.
Or should I include this amount as rental expense/repair in deduction? (i used the money to fix garage)

Does that matter which option i choose?

[PatriciaV]

Yes, it does matter. You can't enter a negative amount for Form 1099-NEC, so you would need to report a 1099-MISC with a negative amount to offset the 1099-NEC income. Both entries would be reported on Schedule 1 Line 8 (in different places). This is generally ordinary income (like wages) but if the two entries offset each other, it wouldn't affect your taxable income.

More importantly, rental income (reported on Schedule 1 Line 5) is passive and subject to passive loss rules. Though, again, the transactions result in a net zero.

Basically, you need to decide which entry accurately reflects the income and expense for this situation.

[Raj_R]

To be clear; I meant adding negative number in the 'miscellaneous income'. Basically negate the amount in 1099-NEC to make net zero.

Think you saying:

- Enter 1099-NEC as it is.

- Enter a negative amount in a 1099-MISC (they both cancel each other and no taxable income. Done)

I could also enter an expense for the amount (deduct the 1099-NEC) but that subject to passive loss rules etc (still less than $25k loss limit)

I like your approach. Its more simpler.

One thing I want to call out is the rental property is under Single Owner LLC. (dont think it makes a difference here as I still use Schedule E)

[PatriciaV]

No, the ownership of the rental property would not affect how you enter Form 1099-NEC and the Miscellaneous Income adjustment.