If you have to report a rental activity on your tax return, you have probably wandered if you can use the new IRS Sec.199A QBI deduction. The answer is: it depends.
Three Ways To Qualify
There are 3 ways in which a rental activity may qualify for the qualified business income deduction:
- using the new safe harbor rule that the IRS just unveiled in the new Notice 2019-07.
- if the rental activity rises to the level of a trade or business as defined by Reg. 1.199A-1, Operational Rules
- if the rental activity rents the property to a commonly controlled business.
In January 2019 the IRS published Notice 2019-07 that provides for a safe harbor rule for using the Sec.199A QBI deduction in a case of a rental activity:
- the taxpayer keeps separate books and records for each rental activity.
- the taxpayer maintains contemporaneous records of time spent.
- the owner, employees or contractors perform 250 or more hours of “rental services”.
Trade or Business
Trade or business means a section 162 trade or business other than
the trade or business of performing services as an employee.
Section 162 doesn’t really define a trade or business, but it details the rules for taking the ordinary and necessary expenses encountered in carrying out a trade or business.
Thus if a rental activity generates legitimate Section 162 deductions, the activity may use the Sec.199A QBI deduction.
If a rental activity doesn’t rise to the level of a section 162 trade or business but the property is rented or licensed to a commonly controlled business as defined under §1.199A-4(b)(1)(i), than the rental activity is treated as a trade or business for purposes of section 199A.
The new tax law contains many limitations and complex rules and it’s important to have a professional help you with your tax situation. Give us a call to see how we can help you.