Final Regs for 199A

[TaxGuyBill]

I think the following from the regulations is much more surprising than any rental issue. Not many saw this coming.

(vi) Other deductions. Generally, deductions attributable to a trade or business are taken into account for purposes of computing QBI to the extent that the requirements of section 199A and this section are otherwise satisfied. For purposes of section 199A only, deductions such as the deductible portion of the tax on self employment income under section 164(f), the self-employed health insurance deduction under section 162(l), and the deduction for contributions to qualified retirement plans under section 404 are considered attributable to a trade or business to the extent that the individual’s gross income from the trade or business is taken into account in calculating the allowable deduction, on a proportionate basis to the gross income received from the trade or business.

That doesn't really surprise me, as it makes perfect sense. If it were a S-corporation, (1) the employer-paid FICA, (2) employer paid health insurance, and (3) employer paid retirement contributions would reduce the corporate profit, thereby reducing QBI for the corporation. So the same things would apply for a Schedule C.

[New York Enrolled Agent]

That doesn't really surprise me, as it makes perfect sense. If it were a S-corporation, (1) the employer-paid FICA, (2) employer paid health insurance, and (3) employer paid retirement contributions would reduce the corporate profit, thereby reducing QBI for the corporation. So the same things would apply for a Schedule C.

TGB - I'd like your opinion on this. Did IRS follow it's own rules in this example in the final regulations? Shouldn't there be an adjustment for (at a minimum) the ½ SE tax? It appears the same $100K is being used contrary to the regulation.

(i) Example 1 to paragraph (c)(3). A, an unmarried individual, owns and operates a computer repair shop as a sole proprietorship. The business generates $100,000 in net taxable income from operations in 2018. A has no capital gains or losses. After allowable deductions not relating to the business, A’s total taxable income for 2018 is $81,000. The business’s QBI is $100,000, the net amount of its qualified items of income, gain, deduction, and loss. A’s section 199A deduction for 2018 is equal to $16,200, the lesser of 20% of A’s QBI from the business ($100,000 x 20% = $20,000) and 20% of A’s total taxable income for the taxable year ($81,000 x 20% = $16,200).

[TAXNJ]

Are you asking it 1099-MISCs need to be issued? That has always been clear.

A "Trade or Business" is required to issue 1099s (when applicable). If you claim QBI, either via the Safe Harbor or not, you are stating it *IS* a "Trade or Business". That means if you claim QBI, you need to issue 1099s when applicable.

It may help understand your statement if you show where in the safe harbor reg. if claiming QBI, one needs to issue form 1099-misc, especially when you say "...if you claim QBI, you need to issue 1099s when applicable."

[TaxGuyBill]

Nice catch. Yeah, it seems like they missed that one.

That was the original example in the Proposed Regulation, and apparently they did not update it to compensate for the changes in the Final Regulation about the1/2 SE tax subtraction. In this specific example, the end result doesn't matter matter because it is using the "taxable income" instead of QBI, but you are right, the example is missing that information.

[TaxGuyBill]

It may help your statement if you show where in the “safe harbor” reg. especially when you say “”...if you claim QBI, you need to issue 1099s when applicable.””

No need to look at the Safe Harbor. §199A says the deduction for QBI is for a "Trade or Business". Right? So by claiming QBI, you are stating it is a "Trade or Business".

§6041 requires a 1099-MISC to be issued when a "Trade or Business" pays $600 or more for non-corporate services.

[Dude]

A rental property held by a sole proprietor or LLC is consdiered a pass through entity. These were ALMOST subjected to 1099 misc reporting but that law was repealed in 2011, arguably because they were not considered "businesses". I am afraid by taking the QBID you are declaring your sole proprietor LLC rental a business and thus inadvertently (in some cases) subjecting yourself to 1099 misc reporting requirements.

In case someone is tempted to point out that the sole proprietorship or LLC is already a business, stop. I am talking about what they are considered in the eyes of IRS for the sole purpose of 1099 reporting.

[ATSMAN]

If you pay non corporate vendors with credit card/paypal etc. there I sno need to send a separate 1099-Misc. So from a practical perspective the average mom/pop landlord could pay the plumber/electrician with CC. For the big jobs that exceed $600 if they pay by check, then consider sending 1099-Misc to be on the safe side. I have told my clients that if they pay with cash, then upon audit without a receipt it will be a problem!

[TomJ]

Other than potentially having to issue 1099s and having carryover QBI losses, is there any other downside to a rental rising to "Trade or Business" status?

[Dude]

If you pay non corporate vendors with credit card/paypal etc. there I sno need to send a separate 1099-Misc. So from a practical perspective the average mom/pop landlord could pay the plumber/electrician with CC. For the big jobs that exceed $600 if they pay by check, then consider sending 1099-Misc to be on the safe side. I have told my clients that if they pay with cash, then upon audit without a receipt it will be a problem!

Yes, BUT we live in era of the predator handyman. People who prey on homeowners: overcharge leave jobs half finished and then will attach a mechanics lien to a property if the owner refuses to pay. This is my point: a good handyman is worth his weight in gold especially to a busy or elderly landlord who relies on them. If this person balks at getting a 1099 you can lose your handyman, a very significant ramification from taking a 20% deduction. I just want my clients to be aware.

[Dude]

Other than potentially having to issue 1099s and having carryover QBI losses, is there any other downside to a rental rising to "Trade or Business" status?

I don't like that the election cannot be reversed.

[TaxGuyBill]

If this person balks at getting a 1099

If he balks at getting a 1099, he is indicating that he is likely a dishonest and predatory handyman, as is likely balking due to avoiding paying tax on it (which is predatory to the US government, and therefore everybody who pays taxes).

[AZUKHiker]

The other thing to bear in mind with planning for QBI is that it is only around from 2018 to 2025. We should not be second guessing what the politicians will do after 2025. Hence I will probably not be electing QBI for loss making rentals if it is likely the losses will continue through to 2025 as many will due to depreciation. Saves all the hassle with 1099-Misc and is valid tax advice based on the Code as currently written.

[Dude]

Take heart? "this notice provides for a safe harbor under which a rental real estate enterprise will be treated as a trade or business solely for purposes of the section 199A deduction".

[WICPA]

Originally posted by Dude View Post
If this person balks at getting a 1099

Agreed with TGB, plus I usually remind my clients if they are unwilling to provide W-9 information then they are probably uninsured as well. Make sure you are carrying WC insurance on these people or you will have issues if something happens to him.

[Burke]

Now it requires a signed statement under penalties of perjury regarding compliance under the safe harbor rules to be attached to any return claiming the Sec 199A credit!

If it said this in the regulations, I missed it. Can you point it out? Or is this just a CYA?