UPDATE: The IRS has posted an early release draft of Form 8995, which will need to be included along with 2019 tax returns to calculate the IRC Section 199A QBI deduction, also known as the 20% pass-through deduction. This document is designed to show the IRS how the qualified business income deduction was computed. The forms are currently not required to be included with tax returns being filed for the 2018 tax year, but taxpayers will need to be aware of these forms going forward.
This is our original article from January 22nd discussing the final regulations for the QBI deduction:
On January 18, 2019, days before the IRS was to open for tax filing season, the IRS issued Final Regulations and Notice 2019-7 on the IRC Section 199A pass-through deduction (also known as the 20% Qualified Business Income Deduction or QBI Deduction). The major changes to real estate are outlined below. Many of these rules are viewed as a win for taxpayers.
- There is a new safe harbor for treating real estate as a trade or business for purposes of the QBI deduction. Generally, it requires that the property not be leased under a triple net lease, not be used as a personal residence and that the property have at least 250 hours of rental services.
- If taxable income is over certain thresholds, the QBI deduction is limited by a percentage of wages paid and a percentage of unadjusted basis of qualifying property owned by the business. For partnerships, a few rules related to property were changed.
- Property will be now allocated to partners based on their economic book depreciation and not the tax depreciation.
- Property contributed to a partnership, in the previous rules, looked at the net adjusted tax basis at the time of contribution. Under the final rules, the original unadjusted basis of property will be used on the date the property was originally placed in service.
- Property acquired in a 1031 or 1033 exchange, in the previous rules, looked at the net adjusted tax basis at the time of exchange. Under the final rules, the original unadjusted basis of property will be used on the date the relinquished property was originally placed in service.
- In the proposed regulations, 743(b) and 734(b) basis adjustments were not treated as qualifying property. The final regulations allow 743(b) basis adjustments as qualifying property but decline to include 734(b) adjustments.
For more information about how these final regulations could impact your business, contact a member of your DGC Client Service Team or Jonathan Farrell, CPA at 781-937-5373 / email@example.com or Patrick Bevington, CPA, MST at 781-937-5365 / firstname.lastname@example.org.