The 20% qualified business income deduction (QBID) is a very beneficial, but complicated tax break that is available for qualifying business income. It allows pass-through entity owners (partners and S corporation shareholders) to deduct up to 20% of their qualified business income.
Earlier this year the IRS announced the finalized safe harbor rule that applies to rental real estate enterprises. Simply stated, this safe harbor rule makes the QBID available for rental real estate enterprises in which 250 or more hours of services are provided each year. A safe harbor is the IRS’s way of providing a guideline to help taxpayers determine if they are eligible for a given tax benefit. If you meet the safe harbor rules and make the election, you are able to take the deduction. You may be able to take the deduction without the election depending on your facts and circumstances, but electing the safe harbor, if you qualify, means that, providing you have followed the rules, the IRS will not disallow the deduction. When relaying on facts and circumstances, IRS disallowance is always possible if they determine that your facts and circumstances do not meet the QBID requirements.
A rental real estate enterprise is one or more residential or commercial real estate properties. Residential or commercial properties can be combined with like properties to achieve the 250 hours, but residential properties cannot be combined with commercial ones.
To be able to claim the QBI safe harbor for rental real estate, four requirements must be met. The most notable of these is the 250 hours or more of services performed for the rental real estate enterprise. These hours can be time spent by owners, employees, and/or independent contractors. It includes time spent making repairs, performing maintenance, collecting rent, and many more services. If the rental real estate enterprise has been in existence for at least four years, the 250-hour requirement will be met if any three of five consecutive years ending with the tax year have had 250 hours or more of services performed. The other requirements are that separate books and records and contemporaneous logs are kept for each real estate enterprise and that a statement claiming the safe harbor is attached to the tax return each year that the safe harbor is claimed. The contemporaneous records must include time reports or logs that list the hours, the services performed, the dates of the services, and who performed them. The contemporaneous records requirement does not apply to tax years beginning before January 1, 2020.
If you are able and decide to treat your rental real estate income as QBI income and you are relying on independent contractor hours, you should consider sending 1099s. Individuals are not required to send 1099s for rental real estate because it is normally considered investment property. But by making the safe harbor election, you are asking for the property to be treated as a business, and businesses are required to file forms 1096 and 1099. You should send 1099 forms to independent contractors other than corporations to whom you paid $600 or more for services. You can handle this yourself by going to Tax1099.com. Or call us; we would be happy to prepare the forms for you.