IRS, Treasury Clarify QBI Tax Deduction
New final and proposed regs on several aspects of the QBI deduction make important clarifications, particularly involving real estate.
The Treasury Department and Internal Revenue Service’s recently released tax guidance on qualified business income deductions will help advisors “make better decisions for their clients,” according to Leon LaBrecque, an advisor and CPA with Sequoia Financial Group in Troy, Michigan.
On Friday, the Treasury and IRS released the following:
A set of regulations finalizing proposed regs issued last summer, as well as new proposed regulations providing guidance on several aspects of the QBI deduction, including qualified REIT dividends received by regulated investment companies;
A revenue procedure providing guidance on determining W-2 wages for QBI deduction purposes; and
A notice on a proposed revenue procedure providing a safe harbor for certain real estate enterprises that may be treated as a trade or business for purposes of the QBI deduction.
The new QBI deduction, created by the 2017 tax law, allows many owners of sole proprietorships, partnerships, S corporations, trusts or estates to deduct up to 20% of their qualified business income.
Eligible taxpayers can also deduct up to 20% of their qualified real estate investment trust (REIT) dividends and publicly traded partnership income, the IRS and Treasury explain.
The QBI deduction is available in tax years beginning after Dec. 31, 2017, which means that eligible taxpayers will be able to claim it for the first time on their 2018 Form 1040.
The IRS and Treasury also explained that the QBI deduction is generally available to eligible taxpayers with 2018 taxable income at or below $315,000 for joint returns and $157,500 for other filers.
Financial advisors can claim the deduction “only if their income is less than $315,000,” said Andy Friedman of The Washington Update, who’s a former tax attorney, which likely makes such a deduction “irrelevant” for most advisors.
Those with incomes above these levels are still eligible for the deduction but are subject to limitations, such as the type of trade or business, the amount of W-2 wages paid in the trade or business and the unadjusted basis immediately after acquisition of qualified property, the final regs state.
LaBrecque notes in his email comments that he had considered the treatment of triple-net leases as “not a trade or business.”
The IRS “confirmed this,” LaBrecque stated, “and investors in triple-net lease will now have to reform their lease agreement, or lose the 20% deduction. We’re wondering if large triple-net portfolios might be better off in a private REIT.”
The IRS also made a “major clarification” on real estate investing, LaBrecque said.
“A ‘hole’ in the proposed regs was where real estate investing fell in the pass-through provisions,” he stated in an email message. The IRS, “through the final regs and the revenue notice, gave us a ‘safe harbor’ for investors who perform, or have someone perform, 250 hours of work a year on actually managing the property (financial management and travel to the business doesn’t count).”
Those businesses, LaBrecque continued, “will be considered a trade or business and eligible for the pass-through.”
The IRS also clarified the rules about ‘pack and crack’, where a specified service business carves off another business line to use the pass-through,” LaBrecque added. The IRS “made it pretty tough to do that if you own all of the business lines.”
Added LaBrecque: The IRS and Treasury regs are ”a testament to some really good IRS employees who did a great job,” despite the government shutdown. The regs “carefully reflected many of the comments and concerns of practitioners.”
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