Qualified Business Income Deduction (QBID) – Rental Enterprise
The Tax Cuts and Jobs Act of 2017 (TCJA) provides the most significant tax legislation changes in the United States for the last 30 years. Due to the nature & quantity of the tax changes, the IRS continues to provide final guidance on matters into 2019. The IRS recently provided final guidance on the deduction for Qualified Business Income (QBI) which offers one of the most significant opportunities to minimize tax liability.
Starting from 1/1/18, the IRS introduced the ‘Qualified Business Income Deduction (QBID). This deduction allows the individual owners of Sole Proprietorships, rental properties, S Corporations or Partnerships or an S Corporation, Partnership or Trust that owns an interest in a pass-through entity to take a 20% deduction from net qualified business income. This deduction may be taken by businesses engaged in a trade or business and certain rental activities.
In order for a rental enterprise to qualify for the Qualified Business Income Deduction, the taxpayer must meet the following requirements for the 2018 tax year (1/1/18-12/31/18):
1) Maintain separate books and records to reflect income and expenses for the real estate enterprise (i.e. management statements or separate financial statements)
2) Minimally, 250 hours a year (4-5 hours a week) must be spent in respect to the real estate enterprise. This hour requirement can be satisfied by the owner, employees, agents or contractors – please be advised that the term agent includes management companies who provide services on your behalf. Types of services which would allow this hour requirement to be satisfied would include advertisement, executing leases, collection of rent, daily operations (repairs, maintenance, cleaning, lawn & pool care), purchasing materials and supervision of management company/employees. Please be advised that revision/preparation of financial statements, procuring property, arranging finance, constructing long-term capital improvements; or hours spent traveling to and from the real estate do not count towards this hour requirement.
3) The property must not be used personally (by owner, friends or family), without fair market value of rent paid, for the greater of 14 days or 10% of the number of days the property was rented. For example, if you rented the property for 200 days, you could use the property personally for up to 20 days and still be eligible for the qualified business income deduction.
4) Taxpayer must sign a separate statement which states that they comply with the above rules under penalties of perjury.
Given that the IRS did not release final guidance on this topic until January 2019, the requirements to be eligible for this deduction for the 2019 tax year (1/1/19-12/31/19) are slightly different than the requirements for the 2018 tax year (1/1/18-12/31/18). The rental enterprise must meet the following requirements for 2019:
5) The above requirements, 1-4, will still apply for the 2019 tax year
6) Maintain a record of time reports or logs which must be available for the IRS to inspect on request. The time reports/logs must include the following:
a. Hours of all services performed
b. Description of all services performed
c. Dates on which such services were performed
d. Who performed such services
Note – suspended losses will be utilized before qualifying for QBID.
This material has been prepared for informational purposes only, and is not intended to and must not be taken as a substitute for obtaining accounting, tax, legal, or other professional advice from a tax professional.