Earlier this month the IRS clarified the rules on the 20 percent deduction on qualified business income from pass-through entities that include sole proprietorships to S corporations. 

The 199A deduction, commonly referred to as the qualified business income deduction, was a welcome (and vague) part of the Tax Cuts and Jobs Act Congress passed in December 2017. 

The deduction was designed for businesses owners who pay their taxes on their personal tax returns — partnerships, limited liability companies and S corporations if they earn less than $157,500, or $315,000 for a married couple. In it’s first year, however, tax professionals were left scratching their heads when it came to interpreting the code when it came to real estate activity.

The language stated real estate activity must rise to the level of a ‘trade or business’ and wasn’t clear enough for most tax preparers to act on.

This year’s proposed regulations added much needed clarification and has been welcome news to an estimated 15 million investors nationwide. To qualify for the deduction property owners, including the people they hire (think painters, contractors, etc) must spend at least 250 hours a year on the business and keep records of all activities.

The proposal further qualifies a real estate business as  “…services performed by owners, employees, and independent contractors and time spent on maintenance, repairs, collection of rent, payment of expenses, provision of services to tenants, and efforts to rent the property. Hours spent by any person with respect to the owner’s capacity as an investor, such as arranging financing, procuring property, reviewing financial statements or reports on operations, planning, managing, or constructing long-term capital improvements, and traveling to and from the real estate are not considered to be hours of service with respect to the enterprise.” 

If you have rental properties and think you qualify, share the 199A details with your tax professional for review. 

January 26, 2019

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