In the waning hours of January 18, 2019, the Treasury Department and IRS released final regulations related to Section 199A of the code, more commonly known as the 20% deduction of qualified business income. Astute Henry+Horne blog readers and newsletter subscribers will recall several articles on this specific topic – one of the largest pieces of the new tax law. The final regulations clear up some confusion on certain items, provide some safe harbors and leave generally alone most of the larger provisions of the proposed regulations detailed here.
Arguably, the largest change in new legislation is an IRS notice released alongside the final regulations, which answers many of the questions we had regarding rental real estate and whether it would qualify for the 20% deduction. Essentially, the notice provides a safe harbor by which a rental real estate enterprise (which can include multiple properties), except one rented to related parties or acting under a triple net lease, will always be treated as a trade or business solely for purposes of the QBI deduction (if you recall, an activity must rise to the level of a trade or business to be eligible for a deduction). Two-hundred and fifty hours of activity, which includes time spent by independent contractors, employees, etc., will make a rental real estate enterprise qualify as a trade or business solely for Section 199A purposes.
A key point to note is that the 250 hours excludes any time related to financial management, including analysis and financial statement prep. Separate books and records, as well as contemporaneous hour records must be kept starting in 2019. Also note that failure to meet these hours will not expressly deny TorB treatment to a rental, but you will have to find another method to qualify as a TorB under existing IRS rules. The final regulations made a point to note that rentals should meet the 1099 filing requirements to be eligible for the QBI deduction as well, so make sure you’re filing those 1099s if you want to take the QBI deduction for your rental!
Another key change is the ability for the business entity to aggregate businesses at the entity level, thus clearing up confusion that may result from unrelated owners and the ability to aggregate certain businesses for QBI purposes. There are clear reporting requirements, and aside from the 2018 returns, amendments will not be allowed for aggregation, so it’s important to study your business structure and see if aggregating your businesses will give you a better 20% deduction.
Several other small changes have been made, including a clarification of the wages allowed for the limitation calculation, ability for certain new partners in a partnership to adjust their unadjusted basis in property for Section 199A purposes and a clarification that property for the limitation must be held at year-end to be included in the limitation calculation.
You should talk with your Henry+Horne CPA to see how the final rules impact your particular situation and if anything can be done to maximize your QBI deduction. Our tax professionals help clients in a variety of industries including construction, dealerships, restaurants, technology and more.
Brock R. Yates, CPA, MT