DANRVAN

06 Procedural requirements for application of safe harbor. A taxpayer or RPE must include a statement attached to the return on which it claims the section 199A deduction or passes through section 199A information that the requirements in Section 3.03 of this revenue procedure have been satisfied. The statement must be signed by the taxpayer, or an authorized representative of an eligible taxpayer or RPE, which states: “Under penalties of perjury, I (we) declare that I (we) have examined the statement, and, to the best of my (our) knowledge and belief, the statement contains all the relevant facts relating to the revenue procedure, and such facts are true, correct, and complete.” The individual or individuals who sign must have personal knowledge of the facts and circumstances related to the statement.

Per Section 3, .03, (C) of the safe harbor: The contemporaneous records requirement will not apply to taxable years beginning prior to January 1, 2019.

SECTION 4. EFFECTIVE DATE AND IMMEDIATE RELIANCE The proposed revenue procedure is proposed to apply generally to taxpayers with taxable years ending after December 31, 2017. Until such time that the proposed revenue procedure is published in final form, taxpayers may use the safe harbor described in the proposed revenue procedure for purposes of determining when a rental real estate enterprise may be treated as a trade or business solely for purposes of section 199A.

https://www.irs.gov/pub/irs-drop/n-19-07.pdf

https://gop-waysandmeans.house.gov/brady-releases-discussion-draft-of-tcja-technical-corrections/

It works the other way Robert. As the tax courts like to say tax deductions are granted by "legislative grace." Both the TCJA BLUE BOOK and the prop. reg indicate that sec 162 will dictate the meaning of trade or business under section 199-A. As we well know, it has been left up to the tax courts to define that definition under sec 162 based on the facts and circumstances of each case. I don't expect the IRS to make a bright line determination anytime soon in regards to whether a real estate rental is a trade or business. I recently saw a copy of the proposed technical corrections bill (now I can't find it) and did not see an clarification in regards to this issue. (I will see if I can find it and post it.)

Terry I am curious as to where the CPE instructor saw a reference to sec 469 in defining a trade or business under sect 199-A . I don't recall such a reference in either the TJCA BLUE BOOK or the prop. reg. Although section 469 was used as an example on page 14 of the blue book as one of the many areas of the tax law that require a taxpayer to make a threshold determination of whether its activities rise to the level of a trade or business, it does not define a trade or business under section 469.

And if they rose to the level of a trade or business they would reduce QBI from other sources!

Section 199-A was highly influenced by real estate lobbyist. Special preference was given to owners of REITs as were owners of qualified property in the form of real estate. Note the wording on page 21 of the TCJA BLUE BOOK: 'For taxable years beginning after December 31, 2017, and before January 1, 2026, an individual taxpayer generally may deduct 20 percent of qualified business income with respect to a partnership, S corporation, or sole proprietorship, as well as 20 percent of aggregate qualified REIT dividends, qualified cooperative dividends,104 and qualified publicly traded partnership income." It does not list REIT dividends as QBI along with that from a partnership, S corporation, or sole proprietorship but instead states "as well as 20 percent of aggregate qualified REIT dividends...". Page 29 of the blue book specifically states that a 199-A deduction is allowed for "qualified" REIT dividends etc. There is similar wording in prop reg 1-199A 3(a). The law expands the deduction beyond QBI to include "qualified" dividends from REITs, therefore an investment in a REIT does not have to rise the to level of a trade or business under section 162 as does a real estate rental. As I read it, a dividend from a REIT qualifies under section 199-A as long as it would not otherwise receive capital gains tax preference.

That is the TCJA document I referred to above. And after reading it again, I still do not see any intent for the definition of a trade or business to go outside the meaning per section 162. In fact, the "Blue Book" refers to sec 162 and uses the same terminology as the courts in defining a trade or business. It even refers to some of the court cases. From page 13: "Trade or business. For Federal income tax purposes, a taxpayer conducting activities giving rise to income or loss must evaluate whether its activities rise to the level of constituting a trade or business.." From page 14 "Many areas of Federal income tax law require a taxpayer to make a threshold determination of whether its activities rise to the level of constituting a trade or business. For example, expenses are deductible under section 162 if they are incurred ‘‘in carrying on any trade or business,’’ 50 the passive activity loss limitation of section 469 can limit losses from an activity that ‘‘involves the conduct of any trade or business,’’ 51 and research and experimental expenditures are eligible for deduction under section 174 if they are paid or incurred ‘‘in connection with [a] trade or business.’’ 52 Courts have held that for an activity to rise to the level of constituting a trade or business, ‘‘the taxpayer must be involved in the activity with continuity and regularity and . . . the taxpayer’s primary purpose for engaging in the activity must be for income or profit.’’ 53 In order to meet this standard, the taxpayer must satisfy two requirements: (1) regular and continuous conduct of the activity; 54 and (2) a primary purpose to earn a profit.55 Whether a taxpayer’s activities meet these factors depends on the facts and circumstances of each case.56" And from page 24 "An activity that is treated as a trade or business for all relevant Federal income tax purposes (and that keeps a complete and separable set of books and records) may be treated as a qualified trade or business. For example, assume that an individual owns a rental building in which the ground floor space is rented to three unrelated commercial establishments (a coffee shop, a drycleaner, and a newsstand) and the upper floors hold apartments rented to residential tenants. For Federal tax purposes, the individual accounts for the rental activities with respect to the entire building using a single set of books and records. Assume further that the individual materially participates in the rental activity, cost recovery deductions under section 168 are allowable with respect to the building, and deductions for expenses with respect to operating and maintaining the building are allowable under section 162. Because a complete and separable set of books and records is kept with respect to the entire building (including the both the commercial and residential rentals), and because deductions under section 162 are allowable, the real estate rental trade or business is a qualified trade or business for purposes of section 199A." The above paragraph from page 24 of the Blue Book appears to say the the activity must rise to the level of a trade or business " for all relevant Federal income tax purposes" in order to qualify for a deduction under section 199-A.

Landlord receiving a crop share reports on form 4835, not subject to SE tax. But the courts have determined that receiving a crop share in itself does not raise the activity to the level of a trade or business. Such would be the case of the landlord whose involvement is limited to depositing a check for his share of the crops.

How are you going to document the intent of congress and defend your position against that of the IRS (as indicated by the proposed reg)? It's been awhile since I read the actual TCJA but I don't believe there was any indication of intent to define trade or business outside that of sec 162, but worth taking another look at it. On the political side, it has been suggested that the provision was thrown in at the last moment to gain the vote of Sen Corker whose level of real estate activity appears to rises high above that of my clients. Unless it's addressed in a technical correction, we might have to wait for the courts to settle it. My client may or may not qualify but probably does not want to be the first test monkey launched into space. More likely will opt to revaluate before SOL ends and possibly amend. But in the meantime I will continue to dig. Client might want to delay or extend filing in the meantime.

Proposed reg 1-199A-1(b)(13) basically says that an activity must rise to the level of trade or business within the meaning of sect 162. Since sect 162 has never defined the meaning of a trade or business you have to look at case law and consider facts and circumstances. In the case of my clients with multi rental properties, I don't see any of them qualifying for section 199-A. However, I do have clients who lease farm land on crop shares who will likely qualify and most likely some who receive CRP payments.

The authority comes from reg 1.179-4(a) which basically refers to the definition of trade or business under section 162. But of course, trade or business has never been defined by section 162 so we rely on case law. In defining a trade or business case law uses terms like regularity, continuous and profit motive. As cbslee pointed there is not enough information in your post to give a clear answer.

Both of those articles where wrote prior to Proposed Reg 1.199A, you should be able to google something more current, I agree they are a good starting point.

I don't think you have given enough info to answer your question. However, I don't think you can call it a theft loss, it sounds more like a bad debt. If so, the question becomes whether it is bad dept from business (write off 100% as ordinary loss) or personal (treated as short term capital loss). Section 166 basically says that a business debt is one created or acquired in connection with a taxpayers business,: or incurred within a trade or business. It depends on facts and circumstances as case law tells us. For example, there was a case where a CPA incurred a business debt when he loaned money to a start up business with the expectation of providing professional services to the business. So in the case of your client, if he can show it was connected to a trade or business he gets a free pass to write it off as an ordinary loss. However, there is another possible twist since you mentioned a partnership. There are cases where the courts have treated loans as a capital contribution in exchange for a percentage of profits. If that was the case, then the loss becomes deductible under section 165. So then the question is whether the house flipping venture was going to be treated as a business or an investment in determining whether an ordinary loss or capital loss was incurred.

How much did your client lose?

Thanks for the reminder, still have some late ones to take care of.

Sounds like client might qualify for OIH under Sec 280A(c) which would make travel to the base deductible. Is it necessary to work from home to carry out employer's business and to allow employee to properly perform his duties?

Congratulations on building a successful practice and entering into a positive exit strategy that will take care of your clients and employees. Best wishes as you enter the next chapter!

Really need more info to provide an answer. Basically "income" distributed to ben's is not taxable on 1041.

If this pertains to the Sub S case then disregard my post above and refer to the previous thread. The key is to liquidate the s-cop before the end of the tax year.

Estate gets stepped up basis at date of death. That won't help much for the wrecked truck and trailer but should not be much gain on the other assets.

How about form 8879? I am really not that concerned about it, but if it becomes a common practice maybe IRS will look into the massive wave of rejects that occurs every year on October 15. By the way, if we happen to become cell mates, I get the top bunk.

Have also done that but keep low key about it with clients. If IRS catches on could be an issue with filing an incorrect and incomplete tax return.