Last October on the Taxing Subjects Podcast, Drake Software’s Bob Nolan, CPA EA and Olena Romanchuk, CPA discussed the then-new proposed regulations for the Section 199A qualified business deduction (QBI) for pass-through entities. While October’s REG-107892-18 provided fairly clear-cut answers regarding what qualifies, our guests mentioned that there were a few areas that needed further explanation, specifically citing the treatment of rental income as a potential problem.
Luckily, the Internal Revenue Service recently released a notice and final regulations clarifying a number of issues, including whether rental property would be considered eligible for QBI. Since QBI is essentially the pass-through version of the new 21% corporate rate that was included in the Tax Cuts and Jobs Act—allowing a deduction of up to a 20% of qualified business income—it’s a topic that has drawn a lot of interest.
According to a recent IRS Newswire, the newly released guidance for a QBI safe harbor that “allows individuals and entities who own rental real estate directly or through a disregarded entity to treat a rental real estate enterprise as a trade or business for the purposes of the QBI deduction if certain requirements are met.” That said, if the taxpayer’s taxable income exceeds $157,500 ($315,000 if filing jointly), the deductible amount is subject to specific limitations. Aside from clarifying the treatment of business rental income in QBI, the IRS also released a revenue procedure explaining how W-2 wages are handled.
Here are the relevant IRS publications listed in the press release:
- REG-107892-18 (Qualified Business Income Deduction)
- Notice 2019-07 (Section 199A Trade or Business Safe Harbor: Rental Real Estate)
- Revenue Procedure 2019-11 (Determination of W-2 Wages)
Source: IRS Newswire