The Treasury Department (IRS) moved with commendable speed and issued final regulations to address several matters involving the new Section 199A, or qualified business income (QBI), deduction. This provision allows for taxpayers with QBI to claim a deduction on their individual tax return equal to 20% of the QBI amount. Our experience with this deduction so far is that it can often result in meaningful federal tax savings.
My colleague Dustin Wiesner covered the proposed regulations in this article last fall: Proposed Regulations Issued on Section 199A: What Do They Mean for Ag Producers?. This piece will focus on a couple of the provisions in the final regulations that I think will impact most impact farmers and ranchers.
Is Rental Income QBI?
There are some instances in which net rental income can be considered QBI. The first is a “safe harbor.”
If you spend at least 250 hours a year performing rental services that are meaningful and significant, the rental profit will qualify as QBI. There are some detailed requirements, one of which is keeping contemporaneous records to document the activity and the hours.
You can group multiple rental activities together for this purpose. However, any properties rented under a triple net lease will not qualify under the safe harbor.
If you don’t meet the safe harbor requirements, you might still qualify for the QBI deduction if all the facts and circumstances applicable to your rental activity are considered to raise the rental activity to that of a trade or business under the law.
If individuals rent their property to an active business(es) that they control, the individual can make a binding election to aggregate or combine the multiple businesses for defining QBI. In short, if this election is made, individual property owners can treat their rent income as QBI and qualify for the 20% deduction. The requirements are:
- The same person(s) directly or indirectly own 50% or more of each business to be aggregated.
- The combination of the businesses rises to the level of an active trade or business.
- The businesses share the same tax year-end.
- None of the businesses are specified service businesses.
- The businesses must be interrelated in respect to products, services, resources, etc.
- The property cannot be rented to a C corporation, although for 2018 only, rent received from a controlled C corporation can qualify if the proper election is made.
The procedure for making the aggregation election is technical. Please be sure to communicate with your CPA or tax preparer to address whether this election is being made or not. Once made, the election is binding. You cannot prepare an amended tax return to reverse an aggregation election.
In summary, these final regulations provide some much-needed guidance for the QBI deduction. The opportunity for tax savings in this area is great if approached properly. If you have any questions or comments, I can be reached at firstname.lastname@example.org, and please be sure to check out our Ag Conversations blog.