In a Revenue Procedure and accompanying News Release (Rev Proc 2019-38, 2019-42 IRB; IR 2019-158, 9/24/2019), IRS has finalized a proposed Revenue Procedure that it issued earlier this year. The Revenue Procedure provides a safe harbor under which a rental real estate enterprise will be treated as a trade or business solely for the purposes of Code Sec. 199A, the qualified business income deduction.
Code Sec. 199A provides a deduction to non-corporate taxpayers of up to 20% of the taxpayer’s qualified business income from each of the taxpayer’s qualified trades or businesses, including those operated through a partnership, S corporation, or sole proprietorship, as well as a deduction of up to 20% of aggregate qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income.
Under Code Sec. 199A(d), a qualified trade or business is any trade or business other than a specified service trade or business (SSTB) or the trade or business of performing services as an employee. Reg § 1.199A-1(b)(14) defines trade or business, in relevant part, as a trade or business under Code Sec. 162 other than the trade or business of performing services as an employee.
The finalized safe harbor is available to taxpayers who seek to claim the deduction under Code Sec. 199A with respect to a rental real estate enterprise. Solely for purposes of the safe harbor, a rental real estate enterprise is defined as an interest in real property held for the production of rents and may consist of an interest in a single property or interests in multiple properties. The taxpayer or RPE relying on the Revenue Procedure must hold each interest directly or through an entity disregarded as an entity separate from its owner under any provision of the Code.
If the safe harbor requirements are met, the rental real estate enterprise will be treated as a single trade or business as defined in Code Sec. 199A(d) for purposes of applying the regs under Code Sec. 199A, including the application of the aggregation rules in Reg § 1.199A-4.
A relevant passthrough entity (RPE) includes a partnership (other than a publicly traded partnership) or an S corporation that is owned, directly or indirectly, by at least one individual, estate, or trust. (Reg § 1.199A-1(b)(10)) RPEs may also use this safe harbor. In order to rely upon the safe harbor, taxpayers and RPEs must satisfy all of the requirements of the revenue procedure.
Failure to satisfy the requirements of this safe harbor does not preclude a taxpayer or IRS from otherwise establishing that an interest in rental real estate is a trade or business for purposes of Code Sec. 199A.
The Revenue Procedure applies to tax years ending after December 31, 2017. Alternatively, taxpayers and RPEs may rely on the safe harbor set forth in Notice 2019-7 for the 2018 tax year. The contemporaneous records requirement will not apply to tax years beginning prior to January 1, 2020. However, IRS reminds taxpayers that they bear the burden of showing the right to any claimed deductions in all tax years.
…Read the full article and expert analysis in Federal Tax Update, available on Checkpoint.
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