Reporting 1099-MISC with Box 1 & Box 7

[mikeonthemove]

I received a 1099-MISC from a Housing Authority (Section 😎 that reported income in Box 1 (Rents) and Box 7 (Nonemployee Compensation). Box 7 amounts equal the security deposit received for the tenant. IRS Topic No. 414 Rental Income and Expenses states "Don't include a security deposit in your income if you may be required to return it to the tenant at the end of the lease," which is true. TurboTax will not let me file electronically unless the Box 7 amount is included in my return. What is my next course of action to complete filing?

I've reviewed other great posts @Howard1948, @ Tiki, @JBrown7B. Unfortunately, some advice was contradictory and also not explicit on using TurboTax to complete this process.

[AmeliesUncle · Accepted solution]

Technically, you can just ignore the 1099-MISC and only enter the actual rent that you received.  But if you do that, you WILL receive a notice from the IRS trying to "correct" it.

One option is to report the amount in Box 7 as "Self Employment" income, then enter an equal deduction to zero it out (resulting in a $0 self-employment profit).  The other option is to file your tax return without that amount from Box 7, and then respond to the IRS notice when you receive it.

[Carl]

Treat this "sa if" you received two physically separate 1099-MISC forms. One with an amount in box 1, and another with an amount in box 7.

Depending on your rental contract with the payer (the payer is not necessarily the tenant either, so you may have a separate contract for that) you treat the box 7 amount *as if* they paid the last month's rent up front.

Now you already know how to enter the box 1 1099-MISC. Use the below guidance to enter the box 7 1099-MISC so that it is ***NOT*** treated as business income and generates a SCH C thus wasting your time and adding to your confusion in future years.

When the tenant vacates and gets their deposit back, you just subtract what you give back from the total rental income received for that year, and you're good.

Reporting 1099-MISC (box 3 or box 7) that is not self-employment income

Under the Wages & Income tab (or Personal Income tab) scroll down to Other Common Income and elect to start/update Income from form 1099-MISC. Then click YES to indicate you have a 1099-MISC.

Enter the 1099-MISC exactly as printed, and then Continue.

Enter the reason you got this money – be it scholarship, bonus, streaking butt naked across the 50 yard line of the super bowl, whatever. Then continue.

Select None of these apply, then Continue.

Select No, it didn’t involve work….. and Continue.

Select ONLY the tax year for which this specific 1099-MISC was issued. Do not select the year that you received the 1099. Select the year for which the 1099-MISC was issued. Select no other year. Then Continue.

Select No, it didn’t involve an intent to earn money, then Continue.

Select NO, then Continue.

Click the DONE button, and that does it.

[Siddharth100]

if I follow this procedure, it increases my taxes and that's really not fair. Is there anything I could do so I don't have to pay taxes on this security deposit?

[AmeliesUncle]

If you follow what I said above, it won't increase your taxes.

Personally, I would complain, complain, and keep complaining to whoever sent you that 1099-MISC and make sure they don't make that mistake again.

[Siddharth100]

AmeliesUncle  thank you for your reply. I see that you have suggested three different options: 

Option 1: not to report 1099-misc (box 7) and provide explaination when IRS sends a notice about it

Option 2: report the amount in Box 7 as "Self Employment" income, then enter an equal deduction to zero it out (resulting in a $0 self-employment profit). 

Option 3: The other option is to file your tax return without that amount from Box 7, and then respond to the IRS notice when you receive it.

If I go with option 2, where exactly do I report the deduction to zero out so the resulting of self employment profit is $0 ?

[AmeliesUncle]

I would enter it as an "other expense" in the business section.  You can even call it something like "non-taxable security deposit" or something like that to briefly explain the situation.