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ILLMAS

QBI from Sch E

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From Pub 535, page 2, middle column

 

"Determining your qualified trades or busi-
nesses. Your qualified trades and businesses 
include your section 162 trades or businesses, 
other than trades or businesses conducted 
through a C corporation, W-2 wages earned as 
an employee, and specified service trades or 
businesses.
In general, to be engaged in a trade or busi-
ness, you must be involved in the activity with 
continuity and regularity and your primary pur-
pose for engaging in the activity must be for in-
come or profit. If you own an interest in a 
pass-through entity, the trade or business de-
termination is made at that entity's level.
The ownership and rental of real property 
doesn’t, as a matter of law, constitute a trade or 
business, and the issue is ultimately one of fact 
in which the scope of your activities in connec-
tion with the property must be so extensive as 
to give rise to the stature of a trade or business. 
However, the rental or licensing of property to a 
commonly controlled trade or business is con-
sidered a trade or business under section 199A"

 

Do you think a client a with a handful of properties would qualify? 

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Perhaps, if he spends the majority of his time and generates the majority of his income from rental activities.

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40 minutes ago, cbslee said:

Perhaps, if he spends the majority of his time and generates the majority of his income from rental activities.

When they then have to pay into SS and MEDA?

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2 hours ago, Roberts said:

When they then have to pay into SS and MEDA?

Rental income is generally not self-employment income.  Section 1402(a)(1) says real estate rental is not SE income unless the rentals are received in the trade or business of a real estate dealer.  Reg. 1.1402(a)-4 explains that "real estate dealer" is someone engaged in the business of selling real estate to customers with a view to the gains and profits that may be derived from such sales. 

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3 minutes ago, EricF said:

Rental income is generally not self-employment income.  Section 1402(a)(1) says real estate rental is not SE income unless the rentals are received in the trade or business of a real estate dealer.  Reg. 1.1402(a)-4 explains that "real estate dealer" is someone engaged in the business of selling real estate to customers with a view to the gains and profits that may be derived from such sales. 

Just so that you aware, the definition of a "real estate professional" has nothing to do with whether an activity does or does not reach the level of an active trade or business, which is based on a totally different section of the code.

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5 minutes ago, EricF said:

Rental income is generally not self-employment income.  Section 1402(a)(1) says real estate rental is not SE income unless the rentals are received in the trade or business of a real estate dealer.  Reg. 1.1402(a)-4 explains that "real estate dealer" is someone engaged in the business of selling real estate to customers with a view to the gains and profits that may be derived from such sales. 

The point was that their business is rental properties to qualify for the QBI, do they have to pay SS and MEDA? If it's a business and not just an investment, FICA and MEDA may apply? But yes, strictly having rental property has historically not made one subject to SS and MEDA.

 

I just got a new tax client because the previous preparer kept insisting the investor must start paying SS and MEDA even though he's 100% just maintaining his investments.

 

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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.

 

 

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I have two clients who are partners in an LLC that operates solely for rental real estate. Under the the following paragraph their properties are held for investment or speculation and do not engage in any other services that are beyond the scope of the partnership therefore making their income from the partnership excluded from SE tax. With that said, my client's position is the same as Danrvan's I don't see how they qualify for the QBI either.

Also, I have several client's who have rental properties as individuals that are held for investments purposes and appear to not meet the conditions of a Trade or Business according to the pub in the OP. It certainly would be nice to have some clear definitive answers in these areas. I am collecting all of the data I can to substantiate my position when I tell them their rental income doesn't qualify for QBI.

I guess the simpler solution is to think that if the activity doesn't generate income subject to SE tax then no section 199A.

Exclusion for Rental Real Estate Income. Net rental income from leased real estate is not included in earnings from SE and thus, is not subject to the SE tax if the real estate is held for investment or speculation. Under two common circumstances, the real estate will not be deemed held for investment or speculation. The first is if the individual is a real estate dealer and holds real property for sale in the normal course of business. Additionally, if the partnership/lessor renders services beyond those that are customarily provided in connection with such leased property or if any services, customary or not, constitute a material portion of the rental payments, the income will be classified as "earned" and subject to SE tax.

 

 

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8 hours ago, DANRVAN said:

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.

 

 

Just attended an OSCPA seminar where at least 3 hours were spent on 199 A.

My thinking has totally changed. The presenter convinced me  that most rentals will qualify for 199 A

Give me a few days to gather my thoughts,  review the seminar materials and I will make a detailed post on this subject.

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Wow, that case is as you said from 1943. I find it odd that this is the only challenge regarding rental property considered as a trade or business. Sorry, but I wasn't going to pay the fee to see if the law is still relevant today. 

FYI- a poster on the Drake Forum supplied an article written by David M. Fogel, EA, CPA, USTCP. In this article it is his opinion that rental property that is simply not held for investment purposes only, and I am assuming he is referring to a passive activity, is considered a trade or business for the purposes of QBI. I know opinions are not case law, revenue rulings or any other official document to rely on. With that said, I think we all should secure as many references, case laws; etc., to be armed for the IRS to challenge a QBI deduction taken for a single rental property owner. 

Just my 2cents worth, I bookmarked the link above. If you want to print the case document, it requires a $65.00 subscription fee.

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1 minute ago, cbslee said:

Just attended an OSCPA seminar where at least 3 hours were spent on 199 A.

My thinking has totally changed. The presenter convinced me  that most rentals will qualify for 199 A

Give me a few days to gather my thoughts,  review the seminar materials and I will make a detailed post on this subject.

cbslee, I agree and am now changing my position as well. Can't Wait to see what you have complied.

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I have read a lot and gone to several seminars on the topic, and virtually all of the authors and presenters said "stay tuned" after giving their yes or no opinions.  After the IRS released the reg last fall they asked for areas in need of clarification.  One of the national accounting boards shared their response and whether rental activity qualifies or does not was one of the first items on the list of things that needed more explanation.  At this point I'd say we still aren't 100% (or even75%) sure.  The 2018 UT software is calculating the QBI for Sch E activities.  Do they know something we don't?

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1 hour ago, SaraEA said:

I have read a lot and gone to several seminars on the topic, and virtually all of the authors and presenters said "stay tuned" after giving their yes or no opinions.  After the IRS released the reg last fall they asked for areas in need of clarification.  One of the national accounting boards shared their response and whether rental activity qualifies or does not was one of the first items on the list of things that needed more explanation.  At this point I'd say we still aren't 100% (or even75%) sure.  The 2018 UT software is calculating the QBI for Sch E activities.  Do they know something we don't?

As I previously mentioned, I attended an all day seminar today sponsored by the OSCPA where the presenter spent at least 3 hours on 199 A.

I think most members of our profession, including me are strongly influenced by what we already know about how tax law and rental real estate intersect.

The problem 199 A presents to both us and to the IRS is that TCJA does not cite or reference most of those familiar Code Sections.

All of those key phrases we have etched in our brains with respect to rental real estate are actually impediments to understanding 199 A

which is exactly why the guidance from the IRS has either been either unclear or yet to be written. 

To paraphrase the ancient chinese curse, we are living in interesting times. 🤔

 

 

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1 hour ago, TAXMAN said:

So what is the opinion. TP has one rental. Provides no service.NO QBI then.

Actually the presenter at OSCPA seminar that  I attended yesterday said that he would claim QBI in scenarios like this.

When I walked into the seminar I wouldn't have claimed it, however after spending 3 hours on 199 A he completely changed my mind ! 

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I think it is a risky position to take.  I think I will lay it out for my clients and allow them to make the choice.

ATX has not put the QBI form out yet, so I am anxious to see how this is going to work from an input standpoint.   I don't know if there is a way to designate that an activity is qualified or not, but it seems to me that there should be a check box or something on the input forms that allow you to say it is or is not QBI.

Tom
Modesto, CA

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31 minutes ago, BulldogTom said:

I think it is a risky position to take.  I think I will lay it out for my clients and allow them to make the choice.

ATX has not put the QBI form out yet, so I am anxious to see how this is going to work from an input standpoint.   I don't know if there is a way to designate that an activity is qualified or not, but it seems to me that there should be a check box or something on the input forms that allow you to say it is or is not QBI.

Tom
Modesto, CA

Why do you think it is risky ? 

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52 minutes ago, ILLMAS said:

"I think it is a risky position to take.  I think I will lay it out for my clients and allow them to make the choice. "   Show them this before they decide:

https://www.law.cornell.edu/uscode/text/26/6662

And include this if they want to take the risk:

https://www.irs.gov/pub/irs-pdf/f8275r.pdf

I think you have prejudged this situation. The name of the presenter and coauthor of the seminar I attended yesterday is Christopher Hesse, who is a National Tax Partner for a National Accounting Firm and who also is currently the Vice Chairman and the  Chairman Elect of the AICPA Tax Executive Committee . He has had multiple meetings with the Senior Staff of the Joint Committee on Taxation who write the Blue Book which is official Statement of Congressional Intent with respect to the TCJA.

He has also has had multiple meetings with senior members of the Treasury Department with respect to the TCJA. Mr. Hesse said, that it is the clear intent of Congress and the administration for Section 199 A and QBI  to be interpreted liberally. I have been attending this seminar for many years and place far more value on what I learn there than any other source. 

However as a famous person once said," The thing about opinions is that everyone has one."  I will sleep quite comfortably following Mr Hesse's advice.😁

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Like this one because it goes back and forth. In the end they have a reasonable opinion.

 

Opinion

 

Nevertheless, when the Internal Revenue Service, tax accountants and tax attorneys throw around the term “Section 162 trade or business,” what they really mean is an activity that the courts and the Internal Revenue Service in past decisions count as a real trade or business that generates legitimate Section 162 business deductions.

These court and IRS decisions, by the way, all sort of work the same way. And if you happen to be interested, probably your best place to dip toes into the water is the Groetzinger v. IRS Commissioner decision.

Groetzinger summarizes nicely what a Section 162 trade or business needs to look. The activity needs to be continuous and not sporadic. And the activity needs to be conducted with regularity and with a profit motive.

And then here’s the really important point for real estate investors. The Section 199A regulations explicitly say that except in one special case situation, direct real estate investment doesn’t–does not–necessarily rise to the level of a trade or business.

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@cbsleeI hear you.   But we all know that Congressional intent and IRS/Tax Court interpretations do not always match up.  For an example, Congress vehemently argued that the ACA Shared Responsibility payment was not a tax, until the 9 clowns in black gowns said it was.   I think I have an obligation to my clients to tell them that the guidance is not clear, and that there is a chance that the deduction will be challenged by IRS.   For those clients who are risk averse, they may not want to roll the dice.   If they choose not to take that position, and guidance comes down that makes it clear they should have, we can amend.  For those clients who want to take the position, I will do so.   If the return is challenged, I will defend the position at audit.   It is ultimately the client who is responsible for the position taken on the return.

Tom
Modesto, CA

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On 1/9/2019 at 10:52 AM, cbslee said:

I think you have prejudged this situation. The name of the presenter and coauthor of the seminar I attended yesterday is Christopher Hesse, who is a National Tax Partner .

He has also has had multiple meetings with senior members of the Treasury Department with respect to the TCJA. Mr. Hesse said, that it is the clear intent of Congress and the administration for Section 199 A and QBI  to be interpreted liberally.

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.

 

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19 minutes ago, DANRVAN said:

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)?  

 

Here you go: https://www.taxreformlaw.com/wp-content/uploads/2018/12/General-Explanation-Of-Public-Law-115-97.pdf

This is the link to the so called TCJA Blue Book,  457 pages long,  published by the Joint Committee on Taxation.😉

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5 hours ago, cbslee said:

Here you go: https://www.taxreformlaw.com/wp-content/uploads/2018/12/General-Explanation-Of-Public-Law-115-97.pdf

This is the link to the so called TCJA Blue Book,  457 pages long,  published by the Joint Committee on Taxation.😉

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.  

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