By Mark Castro, CPA
Rental income will be considered to be qualified business income if it meets the following criteria under the safe harbor rules contained in Revenue Procedure 2019-38.
Under the safe harbor rule, a rental real estate activity falls under the definition of a rental real estate enterprise. A rental real estate enterprise is defined as an interest in real property held for the production of rents and may consist of a single property or interests in multiple properties.
The following requirements must be met for a rental real estate enterprise to be considered a trade or business for purposes of the qualified business income deduction:
For more information, see the following on the IRS website:
Qualified Business Income is defined as the net amount of income, gain, deduction and loss from any qualified trade or business. It includes income from partnerships, S Corporations, sole proprietorships, and certain trusts. It generally includes the deductible part of self-employment tax, self-employed health insurance and contributions to qualified retirement plans (SEP, SIMPLE and qualified plan deductions).
Items such as capital gains and losses, certain dividends, and interest income are not included in the calculation of QBI.
Also, W-2 income, amounts received as reasonable compensation from an S Corporation, amounts received as guaranteed payments from a partnership, and payments received by a partner for services under section 707(a) are also not Qualified Business Income.
For purposes of the qualified business income deduction (Section 199A), a safe harbor rule allows rental real estate activity to be considered as QBI if it meets certain criteria.
For more details see the Qualified Business Income Deduction page on the IRS website.
S Corporations and Partnerships are generally not taxable and cannot take the qualified business income deduction themselves. However, all S Corporations and partnerships must report each shareholder’s or partner’s share of QBI items, W-2 wages, unadjusted basis of qualifying property, qualified REIT dividends and qualified PTP income, and whether or not the trade or business is a specified service trade or business on a statement attached to the Schedule K-1, so the shareholders or partners may determine the qualified business deduction on their own individual federal return.
Eligible taxpayers must have qualified business income in order to take the qualified business income deduction.
For those taxpayers who qualify for the qualified business income, the vast majority will complete Form 8995 (Qualified Business Income Deduction Simplified Computation).
The simplified calculation is the lesser of:
For higher income taxpayers, those whose income exceeds $163,300 ($326,600 for joint filers), the calculation of the qualified business income deduction will be limited as follows (these taxpayers would complete Form 8995-A - Deduction for Qualified Business Income):
For more information see the Tax Cuts and Jobs Act, Provision 11011 Section 199A – Qualified Business Income Deduction FAQs on the IRS website.
Self-rental income will only qualify as qualified business income if it meets the safe harbor requirements for a rental trade or business.
Federal legislation that was signed into law on December 22, 2017. This legislation included changes that reduced tax rates for businesses and individuals, increased the standard deduction and family tax credits, eliminated personal exemptions and made it less beneficial for individuals to itemize deductions. It also included a provision adding the qualified business income deduction to the Internal Revenue Code under Section 199A.
This is the Internal Revenue Code Section that includes the details on the qualified business income deduction.