QBI and Single Rental Property

[TAXNJ]

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?

In response to your post regarding “QBI and Single Rental Property” - IRS information, reference: REG-107892-18 Proposed Regulations Qualified Business Income Deduction.

Below are 3 slides from a recent IRS presentation (each begins in bold print).

Also, the last paragraph addresses form 1099-misc. if interested.


Rentals

Rentals qualify for the QBID if:

The rental activity rises to the level of a section 162 trade or business, or

The rental or licensing of property is to a commonly controlled trade or business

Sometimes referred to as self-rental

Presentation based upon current proposed guidance, subject to change. 27



Qualified Trade or Business

QTB is any trade or business that is allowed a deduction for ordinary and necessary business expenses (section 162), with two exceptions:

the trade or business of being an employee, and

specified service trade or business (SSTB)



Note: The SSTB exception only applies if a taxpayer’s taxable income, before QBID, exceeds the threshold.

Presentation based upon current proposed guidance, subject to change. 25



Section 162 Trade or Business

In general, to be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity and the primary purpose for engaging in the activity must be for income or profit.

For interests owned in a pass-through entity, the trade or business determination is made at the entity level.

Presentation based upon current proposed guidance, subject to change. 26



As far as filing form 1099misc, in IRS audits, we have not experienced clients’ being denied being a “Rental Property” business for not filing form 1099-misc, but rather subject to expensive penalties for not properly filing form 1099-misc.
You can reference penalties for not filing properly (see IRS info Increase in Information Return Penalties) link = https://www.irs.gov/government-entities/federal-state-local-governments/increase-in-information-return-penalties-2

[ValRose]

Thanks everyone so much for this discussion! 1099 Questions, since it seems likely this is an extremely important issue.
Single property landlord, very active in it's management (including going there monthly in person to collect rent check, and managing all repairs). Always shows a profit (low basis, low mortgage).
Assuming we take QBID/199A in 2018.

1) For the last 2 years, only small repairs--no one was paid over $600.
2) Year before that, her prior accountant never talked to her about 1099's.
3) If the IRS potentially did complain about a 1099 she should have sent for 2015 (due January 2016), would that be the only year still open to statute of limitations for penalties?

This tax year (2018) she had LOTS of repairs (a few new windows, new kitchen cabinets and countertop upgrading). I'm in a debate over what to possibly de minimus expense (i.e. a $2000 window invoice). But that's a separate subject.

My 1099 questions are as follows:

A) She bought cabinets from "Cabinets to Go" and since a big national company, assumed they were incorporated. That may not be true (their website nor manta mention anything about incorporation).
Would seem a non-issue except that this (or a similar company) included free installation in the price.
Should company turn out not to be incorporated, would some sort of installation fee need to be inferred and a 1099 sent? Hopefully, I'm being overly cautious here.
B) For other sole prop repairmen, regarding 1099-Misc Box 7 and whether to INCLUDE MATERIALS in the Box 7 amount, the IRS says to include:
• Payment for services, including payment for parts or materials used to perform the services (if supplying the parts or materials was incidental to providing the service)
Note: IRS uses an auto repair as an example, considering the parts costs to be "incidental" to the mechanic shop doing the repair--and hence to be included on the 1099.

So I'm supposing a Landlord who hires a plumber (or other indep contr) would include all the parts charges too on the 1099? (I don't see why it would be different than a repair at an auto shop).
But what if the contractor submits a completely separate invoice for the parts?

I've focused solely on income taxes in the past, but this year offered to prepare her 1099s for her...
Would so appreciate any advice!

[Gretel]

TaxNJ hit the nail on the head. The 1099's have nothing to do with if a rental is considered a business activity or not they are just a consequence. Business activity is regular personal involvement. F.e. if a TP owns a single house and goes by this house every week to pick up trash and dog poop from the lawn, that will make it a business activity with all the gain (QBI deduction) and the pain (1099's),

[TAXNJ]

Form 1099 preparation can be challenging but start reviewing TTB page 23-7, in addition to the mentioned IRS web-site, which should address your form 1099 current questions and future questions.

[ttbtaxes]

TaxNJ hit the nail on the head. The 1099's have nothing to do with if a rental is considered a business activity or not they are just a consequence. Business activity is regular personal involvement. F.e. if a TP owns a single house and goes by this house every week to pick up trash and dog poop from the lawn, that will make it a business activity with all the gain (QBI deduction) and the pain (1099's),

I'll disagree with this statement for those taxpayers in the Second Circuit. It's my opinion that the precedent in Grier and Balsamo has created an uphill battle for those with a single, residential-rental property seeking T or B status in the Second Circuit.

[TAXNJ]

I'll disagree with this statement for those taxpayers in the Second Circuit. It's my opinion that the precedent in Grier and Balsamo has created an uphill battle for those with a single, residential-rental property seeking T or B status in the Second Circuit.

To get a better understanding of your reply post: Will you simply clarify the court's ruling and the facts & circumstances of the cases you referenced that the poster should be aware if and how it would or would not apply in their case.

In addition, will you simply explain what you mean when saying "for those taxpayers in the Second Circuit" and the definition of "T or B status in the Second Circuit."

[New York Enrolled Agent]

: Will you simply clarify the court's ruling and the facts & circumstances of the cases you referenced that the poster should be aware if and how it would or would not apply in their case.

In addition, will you simply explain what you mean when saying "for those taxpayers in the Second Circuit" and the definition of "T or B status in the Second Circuit."

I don't get why it's so hard for practitioners to understand that facts and circumstances control.

It seems to me that Balsamo (a snip follows) supports the notion that a bight-line test does not exist. Grier didn't either - the 2nd Circuit ruled based on the facts.

Our historical position that rental of one property constitutes a trade or businessestablishes a general not an absolute rule. See Fegan v. Commissioner , 71 T.C. 791, 814 (1979), affd. without published opinion (10th Cir. 1981), wherein we referred to "our longstanding definition of 'trade or business' as including under appropriate circumstances the rental of one property" (emphasis added). Our opinion in Curphey v. Commissioner, supra, relied upon by respondent did not turn a general rule into an open-ended facts and circumstances test in every situation. Our discussion of matter-of-law standards therein specifically referred to section 280A. See 73 T.C. at 774. We did no more than suggest that there may be more flexibility in applying the general rule in the context of that section.

[TAXNJ]

I don't get why it's so hard for practitioners to understand that facts and circumstances control.

It seems to me that Balsamo (a snip follows) supports the notion that a bight-line test does not exist. Grier didn't either - the 2nd Circuit ruled based on the facts.

Our historical position that rental of one property constitutes a trade or businessestablishes a general not an absolute rule. See Fegan v. Commissioner , 71 T.C. 791, 814 (1979), affd. without published opinion (10th Cir. 1981), wherein we referred to "our longstanding definition of 'trade or business' as including under appropriate circumstances the rental of one property" (emphasis added). Our opinion in Curphey v. Commissioner, supra, relied upon by respondent did not turn a general rule into an open-ended facts and circumstances test in every situation. Our discussion of matter-of-law standards therein specifically referred to section 280A. See 73 T.C. at 774. We did no more than suggest that there may be more flexibility in applying the general rule in the context of that section.

Maybe you read the reply post differently, because it’s not about why you don't get why it’s so hard for practitioners to understand that facts and circumstances control as you say.

That was not the question asked of the reply poster who was providing an interesting and important reply. But thanks for your brief of the legal summarization.

Rather it was asking the reply poster "simply" how the cases referenced that the original poster should be aware if and how it would or would not apply in their case posted.

Simply asked of the reply poster - what specific impact does/will it have to the original poster’s case posted. That's all –- simple and brief.

[John of PA]

Nothing has changed for 1099 reporting of rental properties, it is not required. The point is well taken that taking the QBI deduction on a rental profit asserts that the rental property is "run like a business" and if that is the case, then 1099's should be issued. be careful about calling all rental properties a business for the QBI deduction because if it is a rental loss, that can then reduce the QBI on other profitable businesses on the tax return.

[Twin Turbo Z]

Ohio has a ITBUS deduction which is similar to the Federal QBI. And residential rentals qualify for Ohio's income reduction. Will be interesting how this pans out on the Fed side.

[tomthomas]

No, you cannot deduct the 20% from rental for having one or two rental houses. You would have to be a professional in the rental business.

[tomthomas]

For Virginia I have seen NO changes concerning the new ted tax changes.

[Rapid Robert]

I don't get why it's so hard for practitioners to understand that facts and circumstances control.

It's not hard to understand, it's hard to implement.

Look, when it comes to worker classification, there are many easily accessible sources of the factors involved, and the questions to ask. Ditto for profit-or-not-for-profit activities - we have nine factors.
Neither of these require a law degree to try to analyze past court cases for different districts.

Where is the equivalent for determination of trade or business? What questions do I ask to perform due diligence? What answers lean one way or the other?

If you were teaching tax school to new preparers, what would you cover in this module?

If you were talking about taxes to ordinary citizens, what would you tell them about how to determine whether their activity is a trade or business?

And as I pointed out earlier in this thread, many preparers are just going to check off QBI for rentals, no questions asked. It will become the de facto way to go, and any preparer who doesn't follow it will eventually be questioned by at least one client, somewhere, as to why they did not.

[ttbtaxes]

"And as I pointed out earlier in this thread, many preparers are just going to check off QBI for rentals, no questions asked. It will become the de facto way to go, and any preparer who doesn't follow it will eventually be questioned by at least one client, somewhere, as to why they did not."

Which is why I have already spoken with every client, by phone or in person, who has rental property.