On January 18, 2019, the United States Internal Revenue Service issued final regulations meant to address the confusion regarding whether a rental business is a “trade or business” under Internal Revenue Code Section 199A. The proposed revenue procedure provides a safe harbor election allowing rental business to be treated as a “trade or business” solely for the qualified business income deduction under Section 199A.
According to the IRS: “Section 199A of the Internal Revenue Code provides many taxpayers a deduction for qualified business income from a qualified trade or business operated directly or through a pass-through entity.”
This new deduction was added as part of the Tax Cuts and Jobs Act of 2017. Pass-through entities include sole proprietorships, limited liability corporations, partnerships and S corporations. The tax for these businesses is passed through to the owner and subject to individual tax rates, which is as high as 37 percent under the TCJA. However, these business owners can now deduct up to 20 percent of their business income on their individual returns.
The IRS released Notice 2019-07 in conjunction with the final regulations offering some clarity around the safe harbor rules.
A rental business qualifies for safe harbor as long as 250 hours of rental services are performed for the business in a given time period. That time period could be: each year for tax years beginning on or before December 21, 2022, or in three of the five prior years for later tax years. Proprietors must also meet record-keeping and other procedural requirements.
The notice outlines rental services as the following:
- Advertising to rent or lease the property
- Negotiating and executing leases
- Verifying information from prospective tenants
- Collecting rent
- Daily operation, maintenance and repair of the property
- Real estate management
- Purchasing materials
- Supervising employees and independent contractors.
It is unclear whether this list is inclusive or exclusive. Arranging financing, procuring properties, reviewing financial statements, managing long-term capital improvements and traveling to and from the rental property are not considered rental services.
The notice names a wide range of persons who can perform rental services on behalf of the business, including the property owner, employees, agents and independent contractors. Property management companies should also qualify as persons who can perform rental services under this broad definition.
BoltNagi PC is a well-established and widely respected business and commercial law firm proudly serving clients in the U.S. Virgin Islands.