The new QBI deduction, created by the 2017 Tax Cuts and Jobs Act (TCJA) allows many owners of sole proprietorships, partnerships, S corporations, trusts, or estates to deduct up to 20 percent of their qualified business income. Eligible taxpayers can also deduct up to 20 percent of their qualified real estate investment trust (REIT) dividends and publicly traded partnership income.The QBI deduction is generally available to eligible taxpayers with 2018 taxable income at or below $315,000 for joint returns and $157,500 for other filers. Those with incomes above these levels, are still eligible for the deduction but are subject to limitations, such as the type of trade or business, the amount of W-2 wages paid in the trade or business and the unadjusted basis immediately after acquisition of qualified property. These limitations are fully described in the final regulations. The QBI deduction is available in tax years beginning after December 31, 2017, meaning eligible taxpayers will be able to claim it for the first time on their 2018 Form 1040.
PurposeThe Treasury Department and the IRS are aware that whether a rental real estate enterprise is a trade or business for purposes of section 199A and, therefore, eligible for QBI deduction is the subject of uncertainty for some taxpayers. To help mitigate this uncertainty, the IRS issued Notice 2019-07 yesterday with proposed revenue procedure that provides a safe harbor for treating a rental real estate enterprise as a trade or business solely for purposes of QBI deduction. Final regulations concerning QBI deduction are being published contemporaneously with the notice.
Effective DateTaxpayers and relevant passthrough entities (RPEs) as defined in §1.199A-1(b)(10) may rely on this safe harbor until a final revenue procedure is issued. If an enterprise fails to satisfy these requirements, the rental real estate enterprise may still be treated as a trade or business for purposes of section 199A if the enterprise otherwise meets the definition of trade or business in §1.199A-1(b)(14).
Rules of ApplicationTo qualify for treatment as a trade or business under this safe harbor, the rental real estate enterprise must satisfy the requirements of the proposed revenue procedure, including the following:
- Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise;
- 250 or more hours of rental services, as described in the revenue procedure, are performed per year with respect to the rental enterprise (or in any three of the five consecutive tax years from 2023); and
- The taxpayer maintains contemporaneous records regarding such rental services, beginning 2019.
ExceptionsCertain rental real estate arrangement are not eligible for this safe harbor:
- Real estate used by the taxpayer as a residence for any part of the year under section 280A; and
- Real estate rented or leased under a triple net lease (including those that require tenants or lessees to pay taxes, fees, and insurance, and to be responsible for maintenance activities for a property in addition to rent and utilities).