Is Your Rental Income
Still Considered QBI?
How The Final 199A Regulations Will Affect Farmers And Landlords
Back in August 2018, the IRS released
proposed regulations regarding the 20 percent
deduction against qualified business income
(QBI). This was an anticipated announcement,
but the proposed rules left much to be desired
as they didn’t provide substantial guidance as
to how farm rental income would be handled.
Fast-forward to January 2019 when the
IRS released its final ruling on the section
199A regulations, but neglected to provide
a definitive answer regarding rental income
– but that doesn’t mean we were left empty-
handed. Keep reading for some additional
insight into this complicated regulation.
WHAT’S NEW?
To be clear, these rules don’t apply to farm
•
For the first $50,000 of its taxable
activities where rent is paid through common income, the tax rate was increased from
With the final regulations, the IRS offered a ownership. However, the final regulations did 15 percent to 21 percent.
safe harbor on rental income. That being said, offer some good and bad news for common it doesn’t apply to triple-net (NNN) leases. ownership landlords and farmers.
Farm landlords with cash rentals who use an
NNN lease to rent their land won’t qualify for
the QBI deduction. This remains true even
if the farm landlord can prove they worked
more than 250 hours arranging leases or
First, the good news is that brothers and
sisters (in most cases) are now considered
to be related parties. Meaning, under a
common ownership arrangement, any rent
STAY UPDATED
If you’re a farmer or farm landlord, the new
regulations give you a lot to think about.
That said, the final ruling offered more
guidance and clarification on the proposed
regulations with more likely to be released,
collecting rent. paid by a pass-through entity or individual However, we learned that crop share leases is considered QBI. On the other hand, the must fulfill two requirements in order to bad news is that any rental income received If you’d like to know more about the final
qualify for the QBI deduction: from a C corporation won’t count as QBI. regulations and how you should prepare from
Landlords will now be required to meet the a tax perspective, give me a call to begin
safe harbor standards, but this situation will discussing your best path forward.
•
NNN crop share leases are not permitted.
This means if a landlord only receives a
share of the crop and doesn’t have any
other crop-related expenses, it will not
be considered QBI.
•
Farm landlords are now required to
prove (to the IRS) that they spend more
than 250 hours per year related to the
rental agreement. Yes, this even applies
if the landlord shares in the expenses
of the crop. So now, if you spend less
than 250 hours on the rental agreement,
you’ll be responsible to argue for QBI.
6
Rise & Shine • Spring 2019
to another pass-through entity or individual
so it’s important for you to stay informed and
updated on these issues.
likely subject the rental income to the self-
employment tax.
Speaking of C corporations, the final
regulations make it so these structures aren’t
desired for farms. The following are the
reasons why:
•
Any rental income received from the C
corporation is most likely not QBI.
•
The meal expense was reduced from 100
percent to 50 percent.
by: David
Shallenberger,
CPA
Senior Manager
545 North Market St.
Wooster, OH 44691
234.249.3454
[email protected]