2019 QBI Deductions and 199A Regulations are Clear as Mud

2019 QBI deductions and 199A regulations and guidance implementing QBI Section 199A deduction were released by the IRS January 18, 2019, and on April 9 the American Institute of Certified Public Accountants (AICPA) requested additional guidance.

2019 QBI Deductions and 199A:
Not for DIY’ers

The AICPA sent a letter to the US Treasury and IRS on April 9, 2019, asking for guidance beyond the corrected final regulations of this portion of the 2017 Tax Cuts and Jobs Act of 2017.

Generally, the request covered clarification on “Qualified Business Income Deduction” and “Section 199A Trade or Business Safe Harbor: Rental Real Estate.” Misinterpretation of these regulations poses problems as investors, contractors, property owners, and other taxpayers attempt to make tax-advantaged business plans for 2019.

Specifically, the AICPA requested additional guidance in five areas concerning the deduction for QBI income under Section 199A:

Safe Harbor for Rental Real Estate
Deemed Trade or Business for All Commonly-Owned Arrangements
Allocation Based on Upon Gross Receipts
Unadjusted Basis Immediately After Acquisition (UBIA) on Section 734(b) Adjustment
Definition of Qualified Business Income (QBI)

2019 business planning requires a flexible tax strategy

2019 QBI deductions and 199A:
An Overview

Safe Harbor for Rental Real Estate provides a safe harbor for when a rental real estate enterprise is treated as a trade or business under section 162 for purposes of section 199A The IRS and Treasury should provide additional information and consideration as follows:

1. Allow for aggregation of commercial and residential rental real estate activities;

2. Allow taxpayers that enter into triple net lease arrangements to qualify under the revenue procedure, in situations where the activities of the taxpayer surrounding the triple net lease would otherwise satisfy the requirements outlined in the revenue procedure;

3. Provide clarity around the taxpayer’s use of real property as a residence in which the taxpayer rents a portion and resides in a portion of the real property;

4. Clarify that the time spent by a professional real estate management company would qualify toward the 250-hour requirement;

4. Reduce the 250-hour requirement;

6. Reduce the requirements of contemporaneous documentation as it relates to independent contractors and agents of the taxpayer; and

7. Provide additional clarity around reporting, specify what a taxpayer needs to include in the reporting statement, and remove the signatory requirement.

Deemed Trade or Business for All Commonly-Owned Arrangements needs consideration and clarification relative to the deemed trade or business requirement for commonly owned entities. Specifically, under these regulations, the deemed trade or business requirement is not met or available if the real estate is leased to a commonly owned C corporation. The AICPA “believes that the tax filing classification of the tenant operating business should not matter with respect to the deemed treatment as one managed trade or business. Therefore, the IRS should amend Regs. Sec. 1.199A-1(b)(14) to include rentals to a commonly owned C corporation as a deemed trade or business for the rental activity. However, aggregation under Regs. Sec. 1.199A-4(b)(1)(i) should continue to deny aggregation with a commonly owned C corporation.” AICPA

Allocation Based on Upon Gross Receipts overview is that individual taxpayers may pay or incur deductions that apply to more than one business. Clarification and consideration are needed for clarification relative to the allocation of deductions between the taxpayer’s multiple businesses. AICPA recommends that taxpayers allocate the various deductions, which are not direct deductions of the trade or business, proportionately to the businesses based upon relative positive QBI – not gross
receipts. AICPA

Unadjusted Basis Immediately After Acquisition (UBIA) on Section 734(b) Adjustment denies an increase in UBIA of qualified property for adjustments under sections 734(b) and 743(b). The final regulations allow a limited adjustment
for excess section 743(b) adjustments, but not for similar adjustments under section 734(b). AICPA recommends that the Treasury and the IRS should provide that an excess section 734(b) adjustment generates UBIA in the same manner as an excess section 743(b) adjustment.

Definition of Qualified Business Income (QBI), which taxpayers and preparers struggle with, needs to be more tightly defined relative to determining which items constitute QBI. The AICPA provides a sentence for inclusion, “The following items are among the trade or business items that are or are not taken into account in computing QBI (not an all-inclusive list).” Also needing clarification are items commonly reported by taxpayers that own relevant passthrough entities. All need additional examples. The AICPA’s letter to the Treasury and IRS includes a list of 7 specific new examples on the following issues:

1. Self-employed health insurance under section 162(l) is a reduction of QBI if the income
associated with the expense is QBI (considering SSTB or non-SSTB status).

2. The deduction for one-half of the taxpayer’s self-employment tax under section 164(f) is a
reduction of QBI if the income associated with the self-employment tax was QBI
(considering SSTB and non-SSTB status).

3. Interest expense attributable to the acquisition of a partnership or S corporation ownership
interest is a reduction of QBI if and to the extent the partnership or S corporation activity
generated QBI (considering SSTB and non-SSTB status).

4. Unreimbursed partner expenses are reductions of QBI if and to the extent the partnership
activity generated QBI (considering SSTB and non-SSTB status).

5. Qualified retirement plan contributions of a sole proprietor or partner are reductions of QBI
to the extent attributable to income-generating QBI (considering SSTB and non-SSTB
status.

6. The state income tax deduction on the Form 1040, Schedule A (Itemized Deductions) for
the taxpayer could reduce QBI to the extent the deduction provided a tax benefit and was
attributable to income generating a deduction under section 199A.

7. The QBI status of royalty income depends upon whether the property generating the royalty
is a qualified trade or business of the taxpayer.

2019 QBI deductions and 199A:
Not a DIY Project

These regulations were, and still are, so complicated that most business owners didn’t know where to start. Successful implementation of your 2019 and forward business planning now requires a level of tax knowledge that most businesses owners readily admit they do not possess.

Maneuvering through the maze of this tax law, still open for major changes, is not something a business owner should attempt on their own. It’s definitely not a DIY project and could leave a business owner dangerously lost and waving red flags at the IRS.

The bottom line

New tax laws aren’t for the faint of heart, DIYers, or “flying-by-the-seat-of-your-pants” kind of person. Don’t go it alone. The QBI deductions and 199A issue are particularly dicey and could be considered as ranking high for serious Tax Gaming.

Whether you’re a business owner or not, every person should have a proactive, planned tax strategy. Don’t just wait for a tax person to tell you what probably happened last year and then tell you how much you owe.

You can have the same opportunities as my clients have to control your own financial future. I can become your CPA tax specialist and financial business and life goals adviser and you can have the control you need and want.

Our goal is to become part of your overall life and business goal planning team so that you’ll be able to establish your own goals and know that you have a trusted professional on your team. We establish and maintain a personal and business relationship with our clients. Your LIFE is your business and your BUSINESS is your life. We’re here for YOU.

Call us at 479-668-0082 Use my Calendly Page (it’s easy) to set an appointment or you can email us.

I earned my reputation as The Radical CPA

You may also be interested in:

How does QBI, Sec 199A, and Triple Net Leases work in Opportunity Zones

Throwing the Dice: Tax Gaming