Source: https://www.districtofcolumbiataxattorney.com/Articles/The-QBI-Deduction-for-Real-Estate-Businesses.shtml
Timestamp: 2020-01-23 07:44:15
Document Index: 442987996

Matched Legal Cases: ['§199', '§199', '§199', '§162', '§162', '§199', '§199', '§199', '§162', '§ 1']

The QBI Deduction for Real Estate Businesses | Frost & Associates, LLC | Washington DC
The Tax Cuts and Jobs Act of 2017 created new Internal Revenue Code (IRC)§199A. Undoubtedly, the new section provides a significant tax break to flow-through entities and structures. Under this new section, subject to certain limitations, taxpayers (excluding C corporations) may be able to deduct up to 20% of the "qualified business income" (QBI) earned in a "qualified trade or business."1 Significantly, this new tax benefit is even available to qualified real estate businesses-but, when does an investment in real estate qualify as a real estate business entitled to the QBI deduction?
Practically speaking, QBI is the taxpayer's ordinary income (less ordinary deductions) earned from a passthrough entity or structure. Technically, QBI is "the net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer."2
The first part of the QBI definition refers to "qualified items of income, gain, deduction, and loss" which must be items thatare: (1) "effectively connected"to aU.S. business,"3 and (2) included or allowed in determining taxable income for the taxable year.4 The second part of the QBI definition references "any qualified trade or business," which means all trades or businesses, excluding "a specified service trade or business, orthe trade or business of performing services as an employee."5 For purposes of this definition, a "specified service trade or business"
As for the definition of IRC §199A's trade or business, the IRS has recently issued proposed regulations which would clarify that:
Unfortunately, although the proposed regulations clarify that the IRS would define an IRC §199A trade or business the same ways it defines trade or business under IRC §162,the IRC §162 definition of "trade or business" has only been developed in the courts and remains subjective. The courts' definition evaluates the activity for continuity and regularity and requires a bona fide subjective intent to make a profit.7
The courts evaluate these elements by considering all of the facts and circumstances of each case. Some factors used in the analysis may include how much time and effort the taxpayer devotes to the activity and the taxpayer's manner in conducting the activity. In cases involving real estate businesses, courts have also considered factors such as the quantity and the quality of the rented properties and the provision of significant services to the tenant. While many courts have disagreed over whether or not ownership of a single rented real property qualifies as a trade or business, the Tax Court at least has mostly favored the notion that one is enough given the right circumstances.8
1 IRC §199A(b)(1)(B).
2IRC §199A(c)(1).For a more comprehensive discussion of QBI, please see our article, Section 199A: New 20% Pass-Through Deduction, at ________________.
4 IRC §199A(c)(3)(A)(ii).
6 REG-107892-18, 83 Fed. Reg. 40884 (Aug. 16, 2018).Note that the proposed regulations would also extend the definition of trade or business beyond the IRC §162 definition by clarifying that "the rental or licensing of tangible or intangible property to a related trade or business is treated as a trade or business if the rental or licensing and the other trade or business are commonly controlled under proposed § 1.199A-4(b)(1)(i)."
8See, e.g. ,Fegan v. Commissioner, 71 T.C. 791, 814 (1979); Elek v. Commissioner, 30 T.C. 731 (1968); O'Madigan v. Commissioner, 19 T.C.M. 1178 (1960); Lagreide v. Commissioner, 23 T.C. 508 (1954), Hazard v. Commissioner, 7 T.C. 372 (1946).