Does QBID make rental income non passive?

[Dude]

QBID implements a 1099 misc requirement (before QBID landlords were not required to issue 1099 misc to those who work on their properties. I assume this continues for those landlords who decline QBID). THis has been discussed here at length.

If QBID makes the rental a business then is the income changed to non passive so that it qualifies for a solo 401k?

[rbynaker]

Rental income is inherently passive. The exceptions are in the passive activity rules of 469 (all those hurdles that real estate professionals have to jump through). QBID has nothing to do with it. Before QBID landlords whose activity did rise to the level of a trade or business were still required to file forms 1099-MISC. Those rules have not changed, they just have a brighter spotlight shown on them now post-TCJA.

[Rapid Robert]

QBID implements a 1099 misc requirement
If QBID makes the rental a business then is the income changed to non passive so that it qualifies for a solo 401k?

I don't agree with your first statement as you worded it, but won't bother arguing that here.

I also don't agree that "QBID [can] make a rental a business". But regardless, why do you think that being a business has anything to do with being passive? A business without material participation is passive, right?

Lastly, no, I'm pretty sure you'll find somewhere in the code that a contribution to a retirement plan requires earned income (e.g. wages or self employment income subject to SE tax) and is not based on whether or not the income is passive.

[Dude]

Rental income is inherently passive. The exceptions are in the passive activity rules of 469 (all those hurdles that real estate professionals have to jump through). QBID has nothing to do with it. Before QBID landlords whose activity did rise to the level of a trade or business were still required to file forms 1099-MISC. Those rules have not changed, they just have a brighter spotlight shown on them now post-TCJA.

Thanks for your response, but QBID does change the nature of rental activity in that requires a statement be signed under penalty of perjury declaring active participation to a level that makes it integral. It is logical that this would lead to one forfeiting the benefits of remaining purely passive in the former sense. In other words your rental becomes a business. I just wonder if this will extend to the Solo 401k, a shelter which before the rental was not eligible.

[Dude]

I don't agree with your first statement as you worded it, but won't bother arguing that here.

I also don't agree that "QBID [can] make a rental a business". But regardless, why do you think that being a business has anything to do with being passive? A business without material participation is passive, right?

Lastly, no, I'm pretty sure you'll find somewhere in the code that a contribution to a retirement plan requires earned income (e.g. wages or self employment income subject to SE tax) and is not based on whether or not the income is passive.

I see that you don't think taking a QUALIFIED BUSINESS INCOME DEDUCTION would not make the entity involved be considered a "business" even though a statement signed under the penalty of perjury attesting to a certain level of material participation that is required. Yeah, I see how that would all be meaningless Thanks for your response.

[rbynaker]

There's no statement required. It's a "trade or business" or it's not based on facts and circumstances. Facts and circumstances can be muddy so the IRS allows taxpayers to use a safe harbor instead of trying to wade though facts in various court cases to make the determination. If taxpayers avail themselves of the safe harbor rules they are required to attach a statement. A rental activity can qualify as a trade or business without needing to use the safe harbor and without needing to attach a statement.

[Dude]

There's no statement required. It's a "trade or business" or it's not based on facts and circumstances. Facts and circumstances can be muddy so the IRS allows taxpayers to use a safe harbor instead of trying to wade though facts in various court cases to make the determination. If taxpayers avail themselves of the safe harbor rules they are required to attach a statement. A rental activity can qualify as a trade or business without needing to use the safe harbor and without needing to attach a statement.

I agree this issue is muddy. I don't think that justifies calling a purely passive rental a Qualified Trade or Business, though I am certain many people are taking QBID who should not.

My point A: QBID is only available with respect to income from a trade or business.

B: it was unclear if rental activity qualilfied for this thus the Safe Harbor guidance was issued

" If you qualify for the safe harbor, you can be assured your rental activities will qualify as a business and that the rental income will be eligible for the 20% deduction (subject to possible limitations). Even if you do not qualify for the safe harbor, you may be able to use a facts and circumstances analysis to support the 20% deduction"

https://www.irs.gov/newsroom/irs-finalizes-safe-harbor-to-allow-rental-real-estate-to-qualify-as-a-business-for-qualified-business-income-deduction

https://www.claconnect.com/resources/articles/2019/irs-safe-harbor-on-section-199a-impacts-tax-filing-for-rental-real-estate

The IRS has gone out of its way to include rental income as Qualified Business Income. I know this is political but if the property is classified as QBID Worthy (sorry Elaine) then I think it should be solo 401k worthy.

[TaxGuyBill]

No, it does not qualify.

To qualify for a 401(k), it is based on "compensation", which is sort-of defined at §401(k)(9). That points to §414(s), which points to §415(c)(3).

The only thing I see in §415(c)(3) that could possibly apply is for "self employment", which then points to §401(c)(2), which then points to §1402(a). §1402 is Self Employment tax, and §1402(a)(1) specifically excludes rentals.

So when you follow the CRAZY bouncing around, it does not qualify.

[Dude]

Thanks for the responses. I figured the chance was slim to none. I hold out hope that we may end up with a court decision, sometime soon, allowing it to be eligible.

[Rapid Robert]

I see that you don't think taking a QUALIFIED BUSINESS INCOME DEDUCTION would not make the entity involved be considered a "business" even though a statement signed under the penalty of perjury attesting to a certain level of material participation that is required. Yeah, I see how that would all be meaningless Thanks for your response.

First, QBI does not determine the nature of the activity, rather the nature of the activity determines whether or not QBI applies. I think you are going to be stuck until you get this part.

Second, I don't think you understand that whether an activity is a trade/business, and whether it is non-passive, are two independent determinations. You seem to think they are different ways of saying the same thing. From Pub 925 (note that a trade/business clearly can also be passive): "There are two kinds of passive activities.
• Trade or business activities in which you don’t materially participate during the year.
• Rental activities, even if you do materially participate in them, unless you’re a real estate professional."

The courts have repeatedly ruled in favor of the concept that even a single property rental can be a trade/business, and this was long before QBID existed, and it applied to rentals that were classified as passive activities. As others have pointed out, no signed statement is required to apply QBID to rental income/losses if facts and circumstances determine it is a business.

Third, I don't think you understand that the basis for tax deferred retirement contributions is having income from (self-)employment, which means FICA or SE tax. Consider how the the calculation is done for S-corp shareholders and partners, who tend to have both ordinary business income as well as income taxed as wage/SE income. Only the latter qualifies for tax-deferred defined contribution retirement plans.

So, in your case, your client could report a rental activity on Schedule C, calculate and pay 15.3% SE tax on the net profit, and then make a 401(k) contribution based on that. If they think it's worth paying an extra 15.3%, that is.

[rbynaker]

So, in your case, your client could report a rental activity on Schedule C, calculate and pay 15.3% SE tax on the net profit, and then make a 401(k) contribution based on that. If they think it's worth paying an extra 15.3%, that is.

If you're implying that this is a voluntary option, I disagree. See regs under 1402:

https://www.law.cornell.edu/cfr/text/26/1.1402(a)-4

You have to meet very specific circumstances for this to be subject to SE tax. Think farms or hotel/b&b.

[Rapid Robert]

If you're implying that this is a voluntary option, I disagree.

I was being somewhat sarcastic, sorry.

[rbynaker]

I was being somewhat sarcastic, sorry.

No problem at all! Just wanted to make sure someone reading literally doesn't try to scheme this somehow. "I read on the Internet that you can . . ."

Rick

[Dude]

First, QBI does not determine the nature of the activity, rather the nature of the activity determines whether or not QBI applies.
Second, I don't think you understand that whether an activity is a trade/business, and whether it is non-passive, are two independent determinations. You seem to think they are different ways of saying the same thing. From Pub 925 (note that a trade/business clearly can also be passive): "There are two kinds of passive activities.
• Trade or business activities in which you don’t materially participate during the year.
• Rental activities, even if you do materially participate in them, unless you’re a real estate professional."

The courts have repeatedly ruled in favor of the concept that even a single property rental can be a trade/business, and this was long before QBID existed, and it applied to rentals that were classified as passive activities. As others have pointed out, no signed statement is required to apply QBID to rental income/losses if facts and circumstances determine it is a business.

Third, I don't think you understand that the basis for tax deferred retirement contributions is having income from (self-)employment, which means FICA or SE tax. Consider how the the calculation is done for S-corp shareholders and partners, who tend to have both ordinary business income as well as income taxed as wage/SE income. Only the latter qualifies for tax-deferred defined contribution retirement plans.

So, in your case, your client could report a rental activity on Schedule C, calculate and pay 15.3% SE tax on the net profit, and then make a 401(k) contribution based on that. If they think it's worth paying an extra 15.3%, that is.

If the "nature" of rental income activity was self evident why do you think guidance and safe harbor were required? The only court rulings that pertain to my original question are the ones denying rental income for inclusion into a Solo 401k. I merely asked if going forward would QBID alter this opinion.