QBI and Single Rental Property

[Raygun99]

Not clear if a married TAX payer making less than 100K in W2 wages happens to own a Rental House clearing 5K per year after depreciation and expenses. Is this 5K schedule E Rental a qualified QBI income eligible for the 20% QBI deduction? Is there any known IRS clarifying statement directed to non-professional rental income?

[ttbtaxes]

On February 21, 2018, the AICPA requested guidance from the IRS regarding this issue. On October 1, 2018, during the comment period, in a letter to Treasury and the IRS, the AICPA once again requested guidance. The IRS has not provided any thus far. Some believe some guidance may be coming this month. We'll see.

There are court cases out there such as Balsamo v. Comm’r., T.C. Memo 1987-477 that address rental properties and IRC 162.

[New York Enrolled Agent]

David Fogel is an outstanding tax pro - an EA, CPA, USTCP and a former IRS Appeals Officer - he writes very good articles. Go to his site and you can download a paper that addresses your question.

https://fogelcpa.com/tax-articles

[ATSMAN]

Without further guidance from IRS I would not elect the QBI in that particular situation. However if guidance is released after taxpayer files, I will amend it. I have made the decision to hold off doing Sch E returns till the end if guidance is expected after filing season starts. Hate to do amendments because IRS was late!

[ttbtaxes]

Another issue to mindful of is the filing of 1099s. If you claim your client has QBI from rental activity, they had better file 1099s. The potential penalties may offset any pass-through deduction.

[ATSMAN]

Another issue to mindful of is the filing of 1099s. If you claim your client has QBI from rental activity, they had better file 1099s. The potential penalties may offset any pass-through deduction.

I agree and this is going to cause some confusion because prior regulations did not require landlords to issue 1099 for rentals that go on Sch E!

[TaxGuyBill]

I agree and this is going to cause some confusion because prior regulations did not require landlords to issue 1099 for rentals that go on Sch E!

I disagree. The rules have always said that a "Trade or Business" needs to issue 1099s. That includes a "Trade or Business" on page 1 of Schedule E.

Many tax preparers have not been issuing 1099s for Schedule E rentals because they have not viewed it as a "Trade or Business", which may be fine. But with the §199A deduction, we now WANT it to be "Trade or Business".

I think a history of not filing 1099s would make a §199A deduction questionable, because the taxpayer has NOT been treating it as a "Trade or Business".

[Kram BergGold]

First the issue of 1099 forms. Payments showing up on Schedule E page 1 are exempt from 1099 reporting. If the net income is considered QBI I don't see how this changes the exemption from 1099 reporting.
At the NCPE individual seminar they felt like any rental with active participation would qualify for QBI.

[TaxGuyBill]

Payments showing up on Schedule E page 1 are exempt from 1099 reporting.

No. That is absolutely not true.

The FIRST and second questions on Page 1 of Schedule E asks if you are required to issue 1099s, and if so, did you actually do it.


§1.6041-1 : "Except as otherwise provided in §§ 1.6041-3 and 1.6041-4, every person engaged in a trade or business shall make an information return for each calendar year with respect to payments it makes during the calendar year in the course of its trade or business"

https://www.law.cornell.edu/cfr/text/26/1.6041-1

Schedule E Instructions (for page 1): "Generally, you must file Form 1099-MISC if you paid at least $600 in rents, services, prizes, medical and health care payments, and other income payments."

https://www.irs.gov/instructions/i1040se#idm140169896409936

If it is not a "Trade or Business", THEN it is exempt from 1099 reporting (they tried to pass a rule that required it for non-Trade-or-Business landlords a few years ago, but they changed that before it took effect).

[ATSMAN]

IMHO until IRS publishes more clarification and guidance for rentals, it would be prudent to issue 1099s to claim it as a trade or business for QBI purpose. That is what I am telling my clients who typically do not issue 1099s related to their rental activity because it was not necessary all these years for 1040 filing.

[TaxGuyBill]

because it was not necessary all these years for 1040 filing.

I think that is what is going to get people in trouble. It always HAS been necessary if it is considered a "Trade or Business". So if taxpayer has not been filing 1099s for years, they have essentially been saying "this rental does not rise to the level of a Trade or Business, therefore I don't need to file a 1099".

So now if you try to claim the QBI on the rental, the IRS has a couple of options: (1) They deny it because you have been claiming it is NOT a Trade or Business for many years, or (2) they agree it is a Trade or Business, and charge you late penalties for all of the missed 1099s in prior years.

[Gene V]

I must be missing something, most of my rental schedule E expenses consist of property tax, interest expense, utilities, fire insurance and usually cost of material for small repairs that they buy from Home Depot--some have had roof replace by some local corporation roofing company.

So I don't see any need to issue 1099's--of course, if I hired some non corp. laborer and pay him over $600, then I should issue a 1099 (is that correct?)

[TaxGuyBill]

]So I don't see any need to issue 1099's--of course, if I hired some non corp. laborer and pay him over $600, then I should issue a 1099 (is that correct?)

Correct, 1099s would only be issued if (1) payments of over $600 were made to non-corporations that provided services (repairs, remodeling, etc.) AND (2) the rental rises to the level of a "Trade or Business".

But if those two conditions are met, a 1099 has ALWAYS been required.

If payments for services over $600 to a non-corporate business were made and a 1099 was NOT issued, that is basically a declaration from the taxpayer that the rental is NOT a "Trade or Business" (and therefore no §199A deduction, according to the current Proposed Regulations).

[ATSMAN]

I think we all can agree that if QBI is to be claimed in a rental activity, the landlord better start issuing 1099-Misc to non corporate service providers. Typically these would be landscapers, handyman and other casual type providers. Most plumbers and electricians in my neck of the wood are corporation or LLC. I am making a quick check list for my sch E clients to gather this information.

[Rapid Robert]

Of course, a trade or business would need a signed W-9 form to show proper determination of whether or not a 1099-MISC was required based on entity type. A trade or business would have those W-9s on file. If you have not been requiring W-9s, then you either should have been doing backup withholding, or you didn't consider yourself a trade or business.

In the end, unless there is bright-line guidance issued, millions of taxpayers including the self-preparers are going to claim QBI deduction for their profitable rentals (and ignore it for the non profitable ones). So it doesn't really matter what we discuss here. What matters is how you answer a client who says "well, everyone else is taking the deduction without any due diligence as to trade or business", because they will be stating the truth.