Question

Your supervisor asks you to look into some administrative interpretations/updates of asks the Qualified Business Income Deduction. Specifically, your supervisor is interested in the question of whether the QBI deduction may apply to a rental activity and, if so, what procedures, activities, etc. are necessary for landlord to qualify for the deduction. The request is prompted by some work your firm is doing for Robert and Catherin Tate, a retired couple who own and operate two small apartment buildings in the local area area. Summary tax results for the properties, from last year’s return, are listed below.

	112 Willow Street	422 2nd Avenue
Rents Received	$48,000	$86,400
Rental Expenses	23,900	33,400
Rental Profit or Loss	24,100	52,000

Although the couple does hire outside persons to assist with some of the repair, legal, and accounting issues, the couple actively manage and work on these properties. Estimated hours performed by Robert and Catherine last year are listed below.

	112 Willow Street	422 2nd Avenue
Hours worked by Robert	140	260
Hours worked by Catherine	40	10

Required:

Research the question posed by the supervisor above and, if the taxpayers qualify for the deduction, advise them what steps may be necessary to qualify and continue to qualify for this deduction. Your firm has other taxpayers who are small landlords so your research and advice may be used for multiple clients.

Answer 1

Here, rental activity of Robert and Catherine Tate qualifies for QBI as it can be termed as a business or trade as per Sec.162.

The final QBI regulations offer three avenues for a rental activity to be considered as a trade or business eligible to generate QBI:

-Rental activity qualifies as a Sec.162 trade or business;

-It rents to a specific related parties or

-It satisfies the requirement of proposed safe harbour.

Robert and Catherine Tate only satisfies first one that is, rental activity qualifies as a Sec.162 trade or business. For a rental activity to a trade or business it requires considerable, regular and continuous activity with a profit motive. Here, their activity satisfies these conditions. Rental of apartment is eligible activity for QBI deduction.

It is not necessary it rents to a specific related party and it satisfies the requirement of proposed safe harbour to qualify for QBI, rental activity qualifies as a Sec.162 is sufficient.

As Robert and Catherine Tate files return jointly their total income should be less than or equal to $315000 to get the direct 20% deduction of QBI. That is,

QBI deduction = QBI*20%

If their total income is more than the limit deduction should be computed as:

QBI deduction is available to whichever of these options is the least;

20% of QBI

or

50% of Company's W-2 wages or sum of 25% of W-2 wages plus 2.5% of the unadjusted basis of all qualified property. We can choose whichever of these two wage test gives greater deduction.

Here, their total income is less than the specified limit and they are qualified for direct 20% deduction on QBI.