Safe Harbor §199A Rental Rules Finalized by IRS

Sometimes the worst thing that happens is when you get what you ask for.  Arguably, CPAs who were asking for guidance on whether a client’s rental was a trade or business for purposes of §199A’s qualified business income deduction ended up in that situation when the IRS released Notice 2019-07 in January 2019 with a draft revenue procedure.  The draft procedure provided a safe harbor test for when the IRS would not challenge the taxpayer’s position that their rental undertaking was a trade or business.

In Revenue Procedure 2019-38[1] the IRS has now finalized that procedure, making some adjustments to the draft procedure but still, arguably, have issued a procedure that only protects rentals that the case law indicates were clearly trades or businesses anyway.

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IRS Official Confirms Mixed-Use Rental Properties Can Be a Single Trade or Business

An issue that has confused taxpayers since the IRS has issued guidance on IRC §199A is whether a taxpayer has to treat commercial and residential rentals as different trades for businesses, especially in the context of mixed-use property.  Tax Notes Today Federal reported on comments from Holly Porter, IRS associate chief counsel (passthroughs and special industries) where she said that such combinations were not prohibited under the general rules for determining the trades or businesses of a taxpayer.[1]

The IRS had included a prohibition on combining commercial and residential rentals into a single enterprise under the proposed safe harbor test regarding whether a rental is a trade or business under Notice 2019-07.  Since it is only a safe harbor, not being able to come under its conditions did not necessarily mean that the undertaking could be a trade or business—just that the taxpayer could not use the safe harbor to establish it was a §162 trade or business eligible for the 20% §199A deduction.

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IRS Greatly Expands Frequently Asked Questions for §199A on Website - And S Corporation Owners Aren't Going to Like the Final Answer

The IRS for the second year in a row snuck a nasty surprise into a frequently asked question section of their website just before the tax filing deadline.  In 2017 the nasty surprise related to the denial of refunds to taxpayers who overpaid taxes but were eligible for the installment payment of the §965 transition tax.

This year’s “April surprise” arrived in the form of a massive expansion of the IRS’s set of frequently asked questions on their website related to the §199A qualified business income deduction (Tax Cuts and Jobs Act, Provision 11011 Section 199A - Qualified Business Income Deduction FAQs).[1]  The April 11 update expanded the FAQ from 12 questions to 33, and saved what many will see as the bombshell for the last question.

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IRS Sends Proposed Regulations on §199A(g) to OIRA

Although we have been through proposed regulations and final regulations issued along with some additional proposed regulations under IRC §199A, the IRS had not yet issued regulations on one portion of the section—IRC §199(g), a provision added as part of the grain glitch fix by the 2018 Consolidated Appropriations Act.

The change provided agricultural cooperatives with a deduction very similar to the old law IRC §199 qualified domestic production activity deduction.  Now the IRS has now sent proposed regulations under IRC §199(g) to the Office of Information and Regulatory Affairs of the Office of Management and Budget (RIN 1545-BO90).

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§199A Signed Safe Harbor Statement Must be Attached as a PDF to an E-Filed Return

If a taxpayer is electing making the safe harbor election for a real estate enterprise under Notice 2019-07 and electronically filing his/her return, a signed copy of the election must be submitted as a PDF attachment to e-filed return reports Tax Notes Today.  In an article in the March 11, 2019 edition of Tax Notes Today, Eric Yauch reports that IRS Office of Chief Counsel Attorney Robert Alinsky confirmed that requirement while speaking at the Federal Bar Association Conference in Washington.[1]

Notice 2019-07, issued concurrently with the final regulations under IRC §199A, provided a draft revenue procedure that allowed a safe harbor election to treat a real estate enterprise as a trade or business which would qualify for the deduction of a qualified business income amount under IRC §199A.  The Notice provided that taxpayers may rely on the proposed revenue procedure until the final revenue procedure is issued by the IRS.

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Can an LLC Operating a Shopping Center with Triple Net Leases for All Tenants Give Rise to Qualified Business Income?

This article  is based on my response to a question raised on an online forum.  The person asking the question recognized the issue, but because I’ve encountered some advisers who have come to believe the safe harbor is “the” test for rentals I wanted to clarify matters a bit.  Hopefully this helps.

Facts: An LLC operates a shopping center with many tenants.  While the leases are all triple net leases, the manager spends over 250 hours a year dealing with items related to the center, including collecting rents, paying the bills, finding new tenants, dealing with vendors and keeping the records of the operation.  The operation doesn’t qualify for the safe harbor of Notice 2017-07 due to being a set of triple net leases.  Does that mean it cannot be a trade or business for Section 199A purposes?

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IRS Changes "Separate" to "Separable" in Describing Requirements for Separate §199A Trade or Business - Do We Care?

What difference can one word make?  That is a question being asked after the IRS published a corrected version of the final regulations under §199A after the IRS modified the preamble to change the word “separate” to “separable” when discussing the conditions under which a taxpayer may be seen to have two trades or businesses.

The IRS Guidewire email that announced the changes as follows:

These corrections include, among other edits, corrections to the definition and computation of excess section 743(b) basis adjustments for purposes of determining the unadjusted basis immediately after an acquisition of qualified property, as well as corrections to the description of an entity disregarded as separate from its owner for purposes of section 199A and §§1.199A-1 through 1.199A-6. The corrected draft has been submitted to the Federal Register for publication.

The corrections to the excess §743(b) basis adjustment portions of the regulations appear extensive at first glance, but do not appear to change the calculation of the amount ultimately.  Rather, the change simply shortens the description of the calculation.

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Second Draft Version of Publication 535 Removes Real Estate and Insurance Agents/Brokers from SSTB Category

In the full draft revision (January 7, 2019) of Publication 535, the IRS removed the language that had previously included real estate agents and insurance agents as specified service trades or businesses from the full publication.

In a previous version of the document the IRS, issued on December 19, 2018, the IRS had provided the following definition of a brokerage business:

Brokerage services, including arranging transactions between a buyer and a seller for a commission or fee such as stock brokers, real estate agents and brokers, insurance agents and brokers, (emphasis added) and intellectual property brokers;

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IRS Draft Publication Includes Real Estate and Insurance Agents and Brokers as SSTBs

On January 7, 2019 the IRS issued a revised draft version of the publication that returns to the position taken in the proposed regulations. Click here to go to that story.

The draft copy of the §199A  section of Publication 535 released by the IRS on December 19, 2018, in describing what is a specified service trade or business has language in it that does not track what was found in the proposed regulations released in August.  The issue involves whether “services performed in the field of brokerage services” includes services performed by real estate agents, real estate brokers, insurance agents, etc. or is limited to the brokerage of financial products.

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Rental Trade or Business Example in Blue Book: Does It Really Tell Us Anything?

The Blue Book released by the Joint Committee on Taxation contains an example on page 24 that is meant to illustrate what constitutes a trade or business for purposes of §199A using a rental as the basis for the example.  Given that one of the major concerns expressed about the application of §199A is when a rental qualifies for the deduction, the insertion of this example initially appears to be welcome news.

However, at least for now, it is not clear if the example found in the Blue Book clarifies matters or simply creates additional questions.

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AICPA Writes Treasury Regarding §199A Issues Requiring Immediate Guidance

The AICPA Tax Executive Committee has sent a letter to the Treasury Department and the IRS outlining areas the Institute believes require immediate guidance for IRC §199A added to the law by the Tax Cuts and Jobs Act.  The list is not a short one—the summary table at the end of the document shows 29 separate items which require guidance, with six requiring immediate guidance and 23 that will also require guidance, presumably before returns begin to be filed for years that IRC §199A applies to.

The letter breaks the requested guidance into six broad areas for which information is needed.  These areas are:

  • Definition of section 199A Qualified Business Income
  • Aggregation method for calculation of QBI of pass-through businesses
  • Deductible amount of QBI for a pass-through entity with business in net loss
  • Qualification of wages paid by an employee leasing company
  • Application of section 199A to an owner of a fiscal year pass-through entity ending in 2018
  • Availability of deduction for Electing Small Business Trusts (ESBTs)

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Government Indicates Priorities for TCJA Guidance

The IRS has begun setting out priorities for guidance on provisions in the Tax Cuts and Jobs Act Guidance per a story posted today by Tax Analysts in Tax Notes Today[1].  The story was reporting on comments by Clifford Warren, special counsel to the IRS associate chief counsel (passthroughs and special industries) and Bryan Rimmke, attorney-adviser, Treasury Office of Tax Policy, given to the New York State Bar Association Tax Section annual meeting on January 23.

The IRS is moving first to deal with the guidance needed on the deemed repatriation provisions of the Tax Cuts and Jobs Act, having already released some guidance in this area.  As well, emergency guidance was issued in the form of Notice 2018-8, giving temporary relief for publicly traded partnerships from the special withholding rules imposed on buyers of certain partnership interests for interests purchased from foreign partners found in newly enacted IRC §§864(c)(8) and 1446(f).

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Qualified Business Income: A Summary of the Provision in the Tax Cuts and Jobs Act

As part of the Tax Cuts and Jobs Act signed into law on December 22, 2017 a new deduction is made available to taxpayers other than corporations that is based on passthrough income.  In this case, passthrough includes not only income from a partnership or S corporation, but also income from any unincorporated trade or business operated by the taxpayer.

The deduction is the total of:

  • The “combined qualified business income amount” of the taxpayer (subject to an adjusted taxable income limit) plus
  • 20% of the aggregate amount of qualified cooperate dividends (subject to a separate adjusted taxable income limit)

The qualified business income deduction is not adjusted for preferences and adjustments in the computation of alternative minimum taxable income. [IRC §199(f)(2)]

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