June 16, 2023
If you run a rental real estate business, you may be eligible to claim the business income deduction under Section 199A in two ways.
Qualified Business Income Deduction (QBI Deduction)
Congress enacted Section 199A to provide a deduction to non-corporate taxpayers of up to 20 percent of the taxpayer's qualified business income from each of the taxpayer's qualified trades or businesses, including those operated through a partnership, S corporation, or sole proprietorship. Plus, individuals, estates and trusts can also deduct 20 percent of aggregate qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income. The deduction is effective for tax years beginning after December 31, 2017, and ending on or before December 31, 2025.
The QBI deduction is calculated as the lesser of:
combined qualified business income (up to 20% of qualified business income, plus 20% of REIT dividends and publicly traded partnership income); or
20% of the taxpayer's taxable income minus net capital gain.
To be eligible for the deduction, the business must be a qualified trade or business. This excludes specified service trade or business (SSTB) or the trade or business of performing services as an employee.
Rentals meet the definition of a qualified trade or business in one of two ways:
a. Rentals to a commonly owned business
A rental activity is considered a qualified trade or business if it rents or licenses tangible or intangible property to a commonly owned trade or business. A business and a rental activity are commonly owned if the same person or group of persons directly or indirectly owns at least 50 percent of each of them. Businesses can meet this common-ownership test even if they are not otherwise eligible for aggregation.
b. Safe Harbor for Rental Real Estate Enterprise
Under a safe harbor provision, a rental real estate enterprise is deemed a trade or business for purposes of Section 199A if the following conditions are met:
separate books and records are maintained to reflect income and expenses for each rental real estate enterprise.
at least 250 hours of rental services are performed per year; and
for tax years beginning after 2019, the taxpayer maintains sufficient contemporaneous records, including time reports, logs, or similar documents.
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