QBI Guidance Issued; Safe Harbor Provided for Real Estate Enterprises
Summary: As we detailed in Section 199A: New 20% Pass-Through Deduction1, the Tax Cuts and Jobs Act of 2017 created new Internal Revenue Code §199A-providing a significant tax break to flow-through entities and structures. Subject to certain limitations, many eligible taxpayers (excluding C corporations) may deduct up to 20% of the “qualified business income” (QBI). Significantly, even qualified real estate businesses may benefit from the deduction.2
As we detailed in Section 199A: New 20% Pass-Through Deduction1, the Tax Cuts and Jobs Act of 2017 created new Internal Revenue Code §199A-providing a significant tax break to flow-through entities and structures. Subject to certain limitations, many eligible taxpayers (excluding C corporations) may deduct up to 20% of the “qualified business income” (QBI). Significantly, even qualified real estate businesses may benefit from the deduction.2
Despite the partial government shutdown, on January 18, 2019, the IRS released the highly anticipated final regulations on the QBI deduction. Along with the final regulations, the IRS also issued three related pieces of guidance: (1) a new set of proposed regulations regarding the deduction; (2) a revenue procedure providing methods for determining W-2 wages for the deduction; and (3) a notice containing a proposed revenue procedure that provides a safe harbor for certain real estate enterprises eligible for treatment as a trade or business for purposes of the deduction.
Taxpayers who have rental real estate businesses should note that they can rely on the safe harbor until a final revenue procedure is issued. The safe harbor defines a “rental real estate enterprise” and clarifies that such an enterprise will be treated as a “trade or business” if the following requirements are met:
- Separate books and records are maintained to reflect income and expenses for each enterprise;
- For taxable years beginning before January 1, 2023, at least 250 hours of rental services must be performed annually;
- For taxable years beginning after December 31, 2022, at least 250 hours of rental services must be performed in three out of the five most recent tax years; and
- Beginning January 1, 2019, contemporaneous records must be maintained which detail: (a) the hours of performed services, (b) a description of performed services, (c) the dates when services were performed, and (d) who performed the services.
If you have questions about whether an investment in real estate qualifies as a real estate business entitled to the QBI deduction, call Frost Law today at 410-497-5947.
2We discussed the QBI deduction for real estate businesses, in The QBI Deduction for Real Estate Businesses, at https://www.districtofcolumbiataxattorney.com/Articles/The-QBI-Deduction-for-Real-Estate-Businesses.shtml.
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