Rental income will be considered to be qualified business income if it meets the following criteria under the safe harbor rules contained in Revenue Procedure 2019-38.
Under the safe harbor rule, a rental real estate activity falls under the definition of a rental real estate enterprise. A rental real estate enterprise is defined as an interest in real property held for the production of rents and may consist of a single property or interests in multiple properties.
The following requirements must be met for a rental real estate enterprise to be considered a trade or business for purposes of the qualified business income deduction:
- Separate books and records are maintained to reflect the income and expenses for each rental enterprise
- For rental real estate enterprises that have been in existence less than 4 years, 250 or more hours of rental services are performed each year. For other rental real estate enterprises, 250 of more hours of rental services are performed in at least 3 of the past 5 years.
- The taxpayer maintains contemporaneous records, including time reports, logs, or similar documents, regarding the following:
- Hours of all services performed
- Description of service performed
- Dates on which such services were performed
- Name of person who performed the services
- The taxpayer attaches a statement to their federal tax return filed for the tax year(s) the safe harbor is relied upon.
For more information, see the following on the IRS website:
- Tax Cuts and Jobs Act, Provision 11011 Section 199A – Qualified Business Income Deduction FAQs – Rentals section
- IRS News Release of September 24, 2019 – IRS finalizes safe harbor to allow rental real estate to qualify as a business for qualified business income deduction
How is the Qualified Business Income Reported
Qualified Business Income is defined as the net amount of income, gain, deduction and loss from any qualified trade or business. It includes income from partnerships, S Corporations, sole proprietorships, and certain trusts. It generally includes the deductible part of self-employment tax, self-employed health insurance and contributions to qualified retirement plans (SEP, SIMPLE and qualified plan deductions).
Items such as capital gains and losses, certain dividends, and interest income are not included in the calculation of QBI.
Also, W-2 income, amounts received as reasonable compensation from an S Corporation, amounts received as guaranteed payments from a partnership, and payments received by a partner for services under section 707(a) are also not Qualified Business Income.
For purposes of the qualified business income deduction (Section 199A), a safe harbor rule allows rental real estate activity to be considered as QBI if it meets certain criteria.
For more details see the Qualified Business Income Deduction page on the IRS website.
Form 1065 and Form 1120-S
S Corporations and Partnerships are generally not taxable and cannot take the qualified business income deduction themselves. However, all S Corporations and partnerships must report each shareholder’s or partner’s share of QBI items, W-2 wages, unadjusted basis of qualifying property, qualified REIT dividends and qualified PTP income, and whether or not the trade or business is a specified service trade or business on a statement attached to the Schedule K-1, so the shareholders or partners may determine the qualified business deduction on their own individual federal return.
Who is eligible
Eligible taxpayers must have qualified business income in order to take the qualified business income deduction.
How much is the QBI deduction
For those taxpayers who qualify for the qualified business income, the vast majority will complete Form 8995 (Qualified Business Income Deduction Simplified Computation).
The simplified calculation is the lesser of:
- 20% of their net qualified business incomeOr
- 20% of their taxable income excluding capital gains
For higher income taxpayers, those whose income exceeds $163,300 ($326,600 for joint filers), the calculation of the qualified business income deduction will be limited as follows (these taxpayers would complete Form 8995-A – Deduction for Qualified Business Income):
- For “specified service businesses”, the deduction begins to phase out once the income limit is reached.
- A “specified service business” is a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading or dealing in certain assets or any trade or business where the principal asset is the reputation of its employees or owners if the trade or business consists of the receipt of income from endorsing products or services, the use of an individual’s image, likeness, voice, or other symbols associated with the individual’s identity, or appearances at events or on radio, television, or other media formats.
- For all other businesses the qualified business deduction is limited to:
- 50% of the W-2 wages paid by the businessOr
- 25% of the W-2 wages paid by business plus 2.5% of the unadjusted basis of all qualified property