Last week, the IRS issued 274 pages of final regulations governing the new Section 199A Qualified Business Income (QBI) deduction. (You’re probably already starting to feel a headache coming on. Don’t worry, we read this stuff so you don’t have to.) The new regulations interpret one of the most important parts of the 2017 tax reform act, a new deduction up to 20% for pass-through income from proprietorships, partnerships, and S corporations.
The law attracted a lot of attention when it first passed. But it also raised a lot of questions. Exactly what sort of activity rises to the level of a “trade or business? (Specifically, does it include your rental real estate activities?) Exactly which businesses are limited by the “specified service activity” rules, and can we get around them?
The biggest question the new regulations answer pertains to real estate rentals. The new rules , along with a separate Revenue Procedure 2019-7, clarify that your property will qualify for the deduction if:
- You keep separate books and records for each activity (or combined activities if you group them together);
- You spend 250 or more hours per year for the activity or combined enterprise; and
- You keep contemporaneous records regarding dates, hours, and descriptions of who performs those services.
The rules also stop you from taking the QBI deduction for any property you occupy yourself for more than 14 days per year (like a lake house you rent out part-time) or on a triple-net lease.
Of course, that effort may not even be necessary for many property owners if your activity already shows a loss. Much of the planning we do at Financial Gravity is designed to make sure you take maximum advantage of the existing rules to avoid taxable income from your rentals in the first place!
The new final regulations also clarify what qualifies as a “specified service business.” That’s important because, if your income rises above $160,700 ($321,400 for joint filers), the QBI deduction phases out. We won’t bore you with the details here. The new regulations also tell us how to aggregate commonly controlled businesses.
Do the new regulations answer all the questions? Of course not. But they will go a long way towards helping you make the most of your opportunities under the new rules. So, don’t hesitate to call us with your questions as we help make 2019 as tax-free as possible!