In 2019, the Department of the Treasury and the Internal Revenue Service provided guidance regarding the determination of when a rental real estate activity may rise to the level of a trade or business for purposes of Section 199A.
The IRS will not challenge a taxpayer’s Qualified Business Income deduction, also known as the pass-through deduction, if the taxpayer met the requirements of the safe harbor as published in Revenue Procedure 2019-38.
Taxpayers who cannot meet the safe harbor test could still claim the pass-through deduction if they met the following requirements:
1. Established their rental activity was a trade or business based on the definition of a trade or business as developed over time through case law,
2. The taxpayer issues the appropriate informational returns, such as Form 1099. Failure to issue these forms could also jeopardize the taxpayer’s deduction of real estate taxes in excess of $10,000 since the IRS could argue that these amounts were NOT incurred in trade or business.
How did we get here?
Notice 2019-7, along with Final Regulations under Section 1.199A-1 through 1.199A-6, were published by the Internal Revenue Service concerning the determination of whether a rental real estate enterprise will be treated as a trade or business for the purposes of Section 199A in order to qualify for the 20% QBI deduction.
Notice 2019-7 outlines requirements for rental real estate enterprises to be treated as a trade or business for purposes of Section 199A. To meet the requirements of the safe harbor of Notice 2019-7, the rental real estate enterprise must:
If the requirements are not satisfied, the rental real estate enterprise may still be considered a trade or business for purposes of Section 199A if it is otherwise treated as a trade or business under IRC Section 162. However, in addition to the safe harbor, the preamble to the Regulations includes language that, “Taxpayers should consider the appropriateness of treating a rental activity as a trade or business for purposes of section 199A where the taxpayer does not comply with the information return filing requirements under section 6041.” IRC Code Section 6041 requires a trade or business to issue 1099s to certain vendors.
DGC recommends that all clients who have rental real estate activities should issue Form 1099s to the appropriate parties by January 31, 2020. If you have questions, contact a member of your DGC client service team or Joel Rothenberg, CPA, JD, LLM at 781-937-5135 / email@example.com or Matthew Mulroney, CPA, MST at 781-937-5372 / firstname.lastname@example.org.
If you would like to get updates and alerts like this sent directly to your inbox, sign up here.