The Qualified Business Income Deduction (QBID), also called the Section 199A deduction, was created in the Tax Cuts and Jobs Act of 2017 (TCJA), and it allows many owners of pass-through businesses to deduct up to 20 percent of the qualified business income from their taxable income.
QBID is generally available to most taxpayers with pass-through business income whose taxable income is at or below certain annually adjusted thresholds. Taxpayers with incomes above these annually adjusted thresholds may still be eligible for the deduction, but the deduction may be subject to limitations based on 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. See Qualified Business Income Deduction - Overview for additional information.
To claim QBID on rental real estate, the activity must be deemed to be a trade or business, in other words activity carried on for a livelihood or in good faith to make a profit. Real estate activity held by passive investors does not qualify as a trade or business, but some rental activity engaged in by a real estate professional (as that term is defined under the passive activity rules in Publication 925) qualifies for the deduction and is eligible for QBID.
For tax year 2018, the IRS issued proposed revenue procedure Notice 2019-07 providing a safe harbor under which a rental real estate enterprise would be treated as a trade or business solely for purposes of QBID. The IRS finalized this safe harbor provision in Revenue Procedure 2019-38 in effect for tax years starting in 2019. The procedure for treating a rental real estate enterprise as a trade or business under this safe harbor requires the following:
- Separate books and records - The taxpayer must maintain separate books and records that reflect the income and expenses for each rental real estate enterprise. Solely for this safe harbor, a rental real estate enterprise is defined as an interest in real property held to produce rent and it may consist of an interest in a single property or multiple properties. The taxpayer may treat each rental property that it holds as a separate rental real estate enterprise or the taxpayer may treat all their real property as a single rental real estate enterprise for QBID purposes, subject to two caveats:
- Once the taxpayer makes this determination regarding the treatment of their rental property, they cannot change it from year to year unless they can demonstrate a significant change in facts and circumstances.
- Commercial and residential real estate may not be part of the same rental real estate enterprise.
Time devoted to rental services - Starting with the 2018 tax year, 250 hours of rental services annually must be performed with respect to the rental real estate enterprise. Rental services can be performed by the taxpayer or by others hired by the taxpayer. For the purpose of this safe harbor, rental services consists of (i) advertising to rent or lease the real estate; (ii) negotiating and executing leases; (iii) verifying information contained in prospective tenant applications; (iv) collection of rent; (v) daily operation, maintenance, and repair of the property; (vi) management of the real estate; (vii) purchase of materials; and (viii) supervision of employees and independent contractors.
Contemporaneous records - The taxpayer is required to maintain contemporaneous records, including time reports, logs, or similar documents, regarding the following: (i) hours of all services performed; (ii) description of all services performed; (iii) dates on which such services were performed; and (iv) who performed the services.
When the IRS first created the safe harbor with Notice 2019-07, this contemporaneous record requirement was to commence in 2019, but it was delayed to tax years starting after 2019 with the final revenue procedure.
- Signed statement of eligibility - The taxpayer must attach a statement to the tax return signed by the taxpayer(s) stating “Under penalties of perjury, I (we) declare that I (we) have examined the statement, and, to the best of my (our) knowledge and belief, the statement contains all the relevant facts relating to the revenue procedure, and such facts are true, correct, and complete.”
To elect the safe harbor and attach it to the tax return in TaxSlayer Pro, from the Main Menu of the tax return (Form 1040) select:
- Rents, Royalties, Entities (Sch E, K-1, 4835, 8582)
- Rents and Royalties - Click New.
- Enter all the information on the Schedule E Rental Property Information Menu. At the bottom of this entry menu, the Safe Harbor Option is available for the user when they select if the property Qualifies for QBID.
Once the safe harbor option is selected, the actual Safe Harbor Election statement can be found and printed for signing purposes from the Main Menu of the tax return (Form 1040) by selecting:
- View Results
- Schedule E Elections
The taxpayer(s) need to sign the election. If the tax return is being e-filed, scan the signed statement and save it as a PDF document so it can be attached to the tax return.
To attach the signed PDF copy of the election to the tax return, from the Main Menu of the tax return (Form 1040) select:
- Income Menu
- Rents, Royalties, Entities (Sch E, K-1, 4835, 8582)
- Attach PDF Document for Rental Safe Harbor Elections - Click New and in the Windows File Explorer window navigate to the document, select it, then click Open.
Note: This is a guide on entering the Qualified Business Income Deduction for rental property and electing the safe harbor under Revenue Procedure 2019-38 in TaxSlayer Pro. This is not intended as tax advice.
For tax returns filed for 2018
For tax returns filed for 2019 and beyond